Reports
Eight Five Questions about 'Producer Organisations' (you may not have thought to ask), December 1996
1. What is a Producer Organisation?
In 1994, the Directorate-General for Fisheries (DG XIV) of the European Commission (EC), published a booklet entitled "The New Common Fisheries Policy" (ISDBN 92-826-7570-X). This booklet, which explained the need for a coordinated European Community policy on fisheries, also detailed the measures, necessary for the effective marketing of fishery products. This included a common marketing standards, a common pricing system, a common trade regime with non EC countries and Producer Organisations.
Producer Organisations are voluntary bodies, to which most fishermen join. In 1994, when the booklet was written, these numbered over 150, representing about 300,000 fishermen throughout the Community. The Producer Organisation functions, by acting on behalf of the fishermen, when they sell their fish to the wider public. The Producer Organisation can regulate the market at times of either shortage or glut, by setting their own withdrawal price and therefore, they are closely involved in the way the market operates. They can thus, help to improve overall quality levels, adjust supply to demand and ensure fishing quotas are also properly managed.
Producer organisations are encouraged by the EC, since they are seen, in line with subsidiarity, to take on a wider role in the running of the Common Fisheries Policy. In this context, individual Member States may extend the disciplines of Producer Organisations to those who are non members. This covers such areas, as quality or the condition of the fish, as well as for management of quotas.
2. Which EC legislation governs the operation of Producer Organisations?
Legislation relating to fisheries policies dates back to the formation of the European Common Market. This legislation is continuously under review and is regularly amended. In the context of this question, the relevant legislation is EEC 3759/92 of 17th December 1992.
The role of a fishery based Producer Organisation is listed under Chapter 1, Articles 4 to 6.
Summarised the legislation is as follows:
Article 4. 1. A producer organisation is any recognised organisation or association established on the producers own initiative. Their purpose is to ensure that fishing is carried out along rational lines and that conditions, for the sale of products, are improved.
Members are required i. to dispose of all their fish through the organisation. ii. to accept the marketing efforts on their behalf. iii. to apply for fishing quota allocation through the organisation.
2. The Producer Organisation must not hold a dominant position in the EC market.
Article 5. The member State may oblige producers, who are not members of the Producer Organisation, but who market any of the listed products within an area where the Producer Organisation operates, to comply with i. marketing and production rules. ii. market withdrawal. However, this extension of rules is subject to a number of specified conditions.
Article 6. Where an extension is applied, the Member State may grant an indemnity to producers who are not members of a Producer Organisation.
This legislation was subsequently amended by Regulation 3318/94, dated 22nd December 1994. The most relevant amendment appears under Chapter 3, Article 7a section 1 which states that the Member State may grant special recognition to those Producer Organisations, who submit a plan to improve the quality and marketing of their products.
Regulation 3759/92 has also spawned other specific regulations, which relate to the recognition and limitations of the legislation. One such regulation is 2939/94, which lays down the rules for the application procedure. This has been amended by regulation 1762/96 to incorporate specific terms for aquaculture producers. Article 2 of 2939/94 has now been amended to include:
Economic activity shall be considered sufficient if the Producers Organisation disposes of at least 25% of the total production of the aquaculture species in question in a production area, which is deemed sufficiently large by the Member State concerned on the basis of criteria established by that Member State.
As it can be seen, the legislation makes it very clear that Producer Organisations operate as voluntary bodies, but under certain trading conditions, the Member State can introduce an extension of discipline to non members.
The general rules, under which this extension applies is laid down in Regulation 1772/82 of 29th June 1982. This states that the marketing discipline shall cover the quality, size and weight of the fishery products and the conditions upon which they are first placed on the market after they have been landed. Non members must also comply with the Community withdrawal price. Finally, the extended discipline can only apply for 12 months.
This legislation was amended by regulation 3190/82, dated 29th November, 1982. This clarified the status of the Producer Organisation requesting an extension to those which account for more than 75% of the total quantity marketed, or if the number of fishermen operating under the Producer Organisation is more than 50% of the fishermen operating in the area.
In addition, the minimum period that the extension shall operate is 90 days. During this period, adequate proposals must be made for the rational disposal of production in order to stabilise the market. Finally, the Member State must publish notification of the conditions necessary for the cancellation of the extension.
The legislation was amended again by regulation 1336/95 of 13 June 1995, altered the wording of selected parts of the previous regulations.
The specific terms of the regulation and how they apply to each situation, are extremely detailed for the purposes of this document, do not require clarification here.
3. Why are Producer Organisations necessary?
Fishermen are totally reliant on the wild catch. They are not able to predict, with any certainty, the type of fish they catch, its' weight, its' size or its' quality. Even more importantly, if any fish are caught at all. With the all the uncertainties of nature, the harvest could range from a bumper crop to a total empty haul. The aim of the Producer Organisation is therefore to assist fishermen to cope with such enormous and unpredictable variations in catch and to make sure that fisherman receive the best possible price for their endeavours.
In addition, stocks of wild fish are under increasing fishing pressure and threatened with possible collapse. Producer Organisations are able to effectively spread the allocation of quotas to ensure that all fishermen have access to the fishing grounds.
4. Why have Scottish salmon farmers requested that Producer Organisations be adapted for the regulation of their industry?
Producer Organisations were intended to help regulate the fisheries industry, however, Scottish salmon farmers have requested that the legislation be adapted for their own use. To understand why, it is first necessary to consider the factors, which prompted the early development of the salmon farming industry as well as the aims and aspirations of the pioneering farmers.
5. What was the motivatation to encourage the start of salmon farming?
The first salmon were put to sea in Europe by the Norwegian company Mowi A/S in 1965, followed three years later, in Scotland, by the Unilever company, Marine Harvest. In both cases, the move towards salmon farming was commercially motivated. This form of aquaculture was not perceived as a way of providing food to those deficient in supplies of fish. Instead, salmon farming was motivated by the potential rewards obtained through the production of a high value species for the luxury market.
Salmon had always been available as a wild caught fish, albeit in relatively small volumes. As with all luxury products, the small amount produced meant that consumers were prepared to pay a premium price for the fish. Both Unilever and Mowi thought that they could capitalise on this luxury market and supplement the limited amount of fish, which were already available. At the time, the idea of fish farming was an attractive diversion for many multi-national companies. Those, who invested in some form of aquaculture included Shell, BP, Blue Circle, Fitch Lovell, as well as Nosk Hydro.
Although it took some years to overcome all the technical problems, by the early 1980s, the leading companies began to reap the huge rewards from salmon farming.
6. Did the early successes, prompt further expansion?
Certainly, the reports of huge profits, encouraged other companies to invest in the fledgling industry. In Scotland, they were prompted by the availability of financial aid, both as grants and low cost loans. These were readily provided by the Highlands & Islands Development Board, who saw salmon farming as an ideal opportunity for job creation and the regeneration of local economies, in a region, suffering from depopulation, primarily, because of the lack of work.
As a result, salmon farming expanded rapidly in Scotland. This was further encouraged by the "yuppie" boom, created by the Conservative government in Britain. Demand for the trappings of wealth swiftly increased and hence, also the demand for salmon. Every fish that could be produced, found a ready market as soon as it attained harvest size. Production continued to soar, reaching a record level of 28,500 tonnes in 1989.
However in 1989, contrary to all expectations, the price of salmon suddenly collapsed.
7. What happened to cause the price to collapse?
The reasons for the price collapse are still disputed and the opposing view will be discussed later. However, as the purpose of this question is to explain how the idea of Producer Organisations was conceived, the explanation given here, will consider the answer from the Scottish industry viewpoint.
In 1989, whilst Scottish production reached 28,500 tonnes, the Norwegian industry were producing about 124,000 tonnes, representing about 4.5 times as much production as then being farmed in Scotland. The Scottish industry therefore, blamed the large scale of Norwegian production, for undermining the price. They claimed that Norwegian production exceeded the market demand for salmon and therefore, they had forced the price down in order to off-load the excess production.
8. What action did the Scottish industry take?
The Scottish industry were stunned that prices had fallen. This was simply not meant to happen. Industry commentators had failed to see the collapse coming and were left wondering, as to what action could be taken.
After consultation, the Scottish industry opted for an immediate response by submitting a complaint to the EC in Brussels. They claimed that the Norwegians were dumping salmon, into the European market, at below the cost of production.
The specific allegations, which were published in February 1990 (90/C 25/05), claimed that Norwegian imports had risen from 21,000 tonnes in 1986 to 28,000 tonnes in 1987, to 45,000 tonnes in 1988 and the prospect of further increases to 75,000 in 1989.
This had resulted in an increase in market share from 58% to nearly 71%, resulting in a decline in the Community producers' share. They also claimed that the sales price of imports had dropped by 18% during the second half of 1989, forcing Community producers to cut their price by 20%. The inevitable effect, was that the financial situation of Community producers would be put in jeopardy, leading to the possibility of bankruptcy and closure.
The problem for Scottish producers, was that the European Commission would not complete their investigation for some months, possibly even a year. Therefore, the introduction of any protective measures could be some time in coming.
9. Was there any other way to protect the industry?
Of all the Scottish salmon farming companies, Marine Harvest were most distraught by the collapse of prices. The management had to answer to their parent company, Unilever, who had been assured that once the early technical difficulties had been resolved, the company would be a financial success. The price collapse brought the run of huge profits to an end and the management had some explaining to do, especially as non had even expressed even a suspicion of the forthcoming price disruption.
Facing a prospect of falling profits, Marine Harvest tried to consider every possible option as to how to maintain profitability. The management were unable to arrive at any conclusion as to what other action could be taken, either in the short or long term.
In almost desperation, the management decided to recruit an external consultancy company. They hoped, that without the shackles of the daily involvement of company affairs, a consultant could be more detached, and therefore reach a viable and workable solution to their problems.
10. Which consultancy was appointed to consider the problem?
The magazine "Fish Farmer" was the first launched in 1977. It was a subsidiary of the well established Farmers Weekly and was intended to satisfy the need for an open forum to discuss the issues of the fledgling fish farming industry. One of the first editors, was Denis Chamberlain, who steered the magazine through its early years. He resigned in March 1980 to take up the position of deputy editor with Farmers Weekly. He later resigned from journalism to establish his own agricultural consultancy, the Chamberlain Partnership.
During the early days of the salmon farming industry, there was a great deal of camaraderie, as everyone was involved in breaking new ground. These early friendships lasted and therefore when Marine Harvest started to consider consultancy companies, there was a natural tendency to look towards existing relationships. It was therefore of no surprise that Marine Harvest should select the Chamberlain Partnership, to act on their behalf. There was some logic to this selection, since Mr Chamberlain had had some experience of the fish farming industry, even though it was nearly a decade previously.
The Chamberlain Partnership specialised in Public Affairs, relating to agriculture and the rural economy. The private (and confidential) commission from Marine Harvest during 1990, to comment on the future profitability of the salmon industry, might be considered as being outside their experience. This view, could have some validity, as Mr Chamberlain then sub-contracted the study to Christopher Ritson, a professor of agricultural economics in the Department of Agriculture and Food Marketing at the University of Newcastle upon Tyne.
Their brief was to attempt to explain the current position; to explore how the market might develop in the 1990s; and to consider whether there might be a case for policy initiatives at either a national or EC level.
Jointly, Ritson and Chamberlain presented their confidential report "The Future Market for Farmed Salmon" to the Board of Marine Harvest, during July 1991.
11. What was the mood of the Scottish industry, when the consultants' report was presented?
Before, the content of the report can be detailed, it is worth considering that the report was submitted only four months after the EC had failed to uphold the Scottish industry complaint of 1989. The Commission published the results of its' investigation on 15th March 1991 (91/142/EEC) and whilst, it did uncover some evidence of dumping, the Commission decided not to take action against Norwegian producers.
The Commission found that the complainants had been able to limit their loss of market share to 2.3% because of increasing consumption. Together, with proposed measures introduced by the Norwegian Government, the Commission found no need for further action and the case was terminated.
Against this background, of a failed complaint, Marine Harvest had even a greater urgency to find a solution for a quick and lasting return to profitability. Therefore, the Board were undoubtedly more receptive to the reports recommendations, than they would have been, had the EC imposed any measures.
12. What were the consultants' conclusions?
The report "the Future Market for Farmed Salmon" was a private commission and therefore, has never been published. However, it is possible to conclude, as to what the report contained, by considering the information, detailed in two sources. The first is a report of an Extraordinary General Meeting of the Irish salmon Growers Association, which took place on 30th July, 1992, which was addressed by Mr Chamberlain
Until, this report appeared in the summer 1992 issue of Aquaculture Ireland, knowledge of the report had been extremely limited. Marine Harvest had been so impressed with it, that they passed it onto the executive of the Scottish Salmon Growers Association. After private discussion amongst selected members, the SSGA decided to adopt the reports' recommendations. The Irish meeting had been the first publicised attempt to persuade other salmon farming industries, to adopt the recommendations as well.
The second source is a booklet, written by Professor Ritson in 1993, entitled "The behaviour of the farmed salmon market in Europe: A review" and published by the University. In this booklet, he discussed his involvement in the compilation of the 1991 report.
The clear message from their report was that the industry should establish a system of Producer Organisations, to stabilise the market.
13. How did they reach this conclusion?
Mr Chamberlain explained to the Irish meeting that salmon farming was no different to other forms of agriculture, in that it displayed a cyclical pattern of "boom and bust", related to supply and demand.
He went onto explain that unless real efforts are made to correct the situation, then the industry would be trapped in the cycle with catastrophic results.
His solution, for evening out the cycle, is to regulate the amount of product reaching the market, by matching supply to demand. This regulation of supply to demand, would then stabilise the price of salmon.
However, Mr Chamberlain recognised that regulation of the market is not without difficulties. Europe wide discussions could render farmers liable for prosecution under Anti-Competition law, unless the farmers were members of Producer Organisations, an established EC mechanism for regulating the fisheries market.
He went on to explain that the Common Fisheries Policy, the procedures which allow Producer Organisations in the fisheries sector also allows:
- Producer Organisations to be formed by salmon farmers.
- National Government assistance.
- Producer Organisations to set a minimum price for salmon, with an withdrawal financed by a levy.
- the setting of a maximum price at which salmon could be withdrawn by the Producer Organisation.
He also said that the EC legislation could be extended to allow Producer Organisations to be reimbursed for withdrawal or paid carry over premiums. It could also be made compulsory, that non-members respected the market discipline laid down by the Producer Organisation.
14. How would the Producer Organisation operate?
The original idea, as conceived by Ritson and Chamberlain, was that the salmon farming Producer Organisation would operate in much the same way as those in the fisheries sector.
At times when production started to excede demand, the Producer Organisation would start to withdraw fish from the market, once it fell to an agreed set price. This salmon would be held in storage until prices recovered. The salmon then would be released onto the market in a controlled manner. The cost of this withdrawl would be partly financed by the EC, partly by the Member State and partly from levies paid by the farmers themselves.
This system was then reconsidered following the experiences of the Norwegian salmon industry during 1991.
15. What happened to make the consultants reconsider this proposal?
Under pressure from the Scottish industry, the Norwegian salmon sales organisation (FOS) decided to withdraw salmon from the market to stabilise the selling price. Unfortunately, the withdrawal process was extremely expensive and eventually bankrupted FOS. This had significant knock on effects, right throughout the Norwegian economy. However, even early on during the withdrawal programme, it was clear that the process would not be effective in relation to salmon farming.
It was apparent that the consultants would find it difficult to promote a price stabilisation programme based on product withdrawal, at a time, when such a scheme was clearly not working. Mr Chamberlain therefore, proposed a second option.
16. What were these alternative proposals?
Mr Chamberlain suggested that a more effective method of attaining market stabilisation would be to tackle the problem from the beginning of the production process. He proposed that the number of smolts, put to sea, be controlled.
He said that this would work in practice through a programme of market monitoring by the EC. Working in collaboration with a Community Industry Management Committee and representatives of the Norwegian industry, the number of smolts could be controlled. This would involve the removal of a specified quantities of smolts from the industry, at times when a potential over-supply was anticipated.
This is the mode of operation, which was subsequently adopted as the most appropriate, for stabilising the salmon market in Europe.
17. Using hindsight, would this proposal have prevented the market disruption, which has continued to plague the industry?
To answer this question, it is necessary to consider each incident separately. The initial occasion was in 1989, when prices, first collapsed. Even had the structure for Producer Organisations been in existence during 1989, it is extremely unlikely that the Management Committee would have forecasted a price collapse, since the Management Committee is made up of representatives of the industry itself. As no-one predicted a price collapse was imminent, in terms of their own companies, there is nothing to suggest that they would have done so in collaboration. Certainly, all the market indicators were pointing to continued market growth and a healthy market demand.
It is fair to conclude, that the presence of a network of Producer Organisations would have therefore, exhibited no effect on the prevention of a price collapse in 1989.
Both Ritson and Chamberlain claim that the price collapse was actually predictable, but their assertion will be discussed later, as will the real reasons for the price collapse of 1989. Certainly, the price collapse in 1989, was very different to subsequent collapses, as will be discussed later.
18. So what caused prices to collapse in 1991?
The price collapse of 1991, was very different to that of two years previously. Whilst, each price collapse was predictable, this second collapse was even more so. The reason being, that the Norwegian Salmon Sales Organisation (FOS) tried to interfere with the market, through the withdrawal of fish into a costly freezing programme. Whilst, this was the exact method of market control advocated by Mr Chamberlain, he excused its' failure by suggesting that the programme was applied to late and a huge backlog of salmon had already built up.
Another explanation could be that buyers were aware of the withdrawal programme and simply refused to be bullied into buying salmon at a protected market price. They therefore, delayed many of their buying decisions until the prices started to fall. Inevitably, prices could not be sustained, both because of the buyers and also because of the high costs of operating the freezing programme.
The price of salmon collapsed in 1991, simply because the industry in Norway tried to artificially regulate the market. This was a clear demonstration that market regulation, as proposed by Chamberlain and Ritson, is a costly exercise, which does not work.
19. So what caused the price to collapse in 1993?
Following similar claims in 1991, the Scottish industry continued to accuse the Norwegians of over-producing. In 1993, the price of salmon collapsed yet again, and the Scottish industry naturally laid the blame at Norways' door. However, this was not actually the case.
1993 was an ideal year for farming salmon. The weather was generally good and water temperatures were elevated. These factors, together with improvements in farming techniques, reductions in stocking density, better healthcare and high specification feeds, all contributed to the promotion of faster growth rates. In fact, conditions were so good in Scotland, that they were ideal for the development of grilse.
As a result grilse rates rose from 10 to 55%, leaving farmers with a problems. These fish had to be harvested, or else deteriorate. Unfortunately, when grilse started to appear, prices were low, as they generally were during the summer. Placing large numbers of fish on the market then, would inevitably prevent the price from strengthening. A decision was taken to put some of these fish into cold store and release them slowly onto the market in the run up to Christmas, when prices would have improved.
Unfortunately, luck did not favour Scottish producers. Firstly, buyers became aware of stocks of fish and held out for prices to weaken further. Estimates of grilse numbers were much lower than actually developed, meaning that even more fish came available for the market.
Finally, the quality of the fish in storage started to worsen. These factors weaken the price further, in fact so much, that some wholesalers, even asked to be paid to take the fish.
The Scottish industry tried to divert attention away from their own problems and push the blame towards Norway. They petitioned the British Prime Minister and even placed large advertisements, demanding Government support, in the broadsheet newspapers.
In this instance, it is obvious that Producer Organisations would have had little effect, since even the most stringent control of the number of smolts put to sea, could have influenced the rate of grilsing, over two years later.
20. What about the events of 1995?
Following the collapse in 1993, the Scottish industry continued to issue dire warnings of forthcoming collapses. They first predicted another collapse for the end of 1994, but when this failed to materialise, it was predicted for the beginning of 1995, then the middle of 1995 and finally the end of 1995. They argued that Norwegian production was expanding at over 40%, at a time when market expansion was less than 20%. This, they said, could only lead to further collapses. In addition, the Scottish industry warned of 90,000 tonnes of extra production by Norwegian farmers, the presence of which, they claimed would result in a total collapse of prices.
Inevitably, after months of dire warnings, buyers waited for falling prices, before offering contracts. With uncertainty about the markets, the price of salmon responded downwards.
Having listened to the continued warnings, sections of the Norwegian industry, began to believe the Scottish claims. An action committee was formed whose brief was to consider remedial measures. The presence of this committee simply endorsed Scottish claims and the market lost confidence and the price collapsed again.
In this instance, the advocates of Producer Organisations might suggest that production control could have prevented the collapse. However, as Norway had been harvesting an increased tonnage on a regular basis, the extra production had been easily absorbed by the market and was not excessive to demand.
The reality was that industry confidence had been undermined by continuous warnings of Norwegian over-production, even though there was no evidence of such excessive production. It is questionable whether the presence of a Producer Organisation would have made any difference, since it is clear that the salmon was been sold. It simply would depend on whether a consensus opinion could be reached in the management committee. Norwegian producers obviously thought that there was a market for this fish, whilst their Scottish counterparts did not. Under-estimates of the market demand might have led to a shortfall, but whether this is desirable, is also questionable.
These are issues which will be discussed later.
21. Can Producer Organisations solve the problems of over-production?
The four price collapses, with their very different causes illustrate that Producer Organisations may not be the lasting solution to over-production, which Ritson and Chamberlain claim. The reason is obvious, if production figures are examined.
When the Scottish industry first complained about Norwegian over-production, Scottish production had reached 28,000 tonnes. This year, production is forecasted to top 80,000 tonnes. If Norway is over-producing, then so is Scotland. Scottish producers have made little effort to control their production.
Since 1989, Norwegian production has expanded by about 120%, whilst that in Scotland has expanded by 185%.
Scottish producers may argue that their market has also expanded, but so has that for Norwegian salmon. The Scottish industry claim that Norwegian production is out pacing the growth in market demand, but then so must that of Scotland. In fact, market demand has kept pace with production and this is demonstrated by the lack of any stocks of unsold salmon. If any salmon producer was actually over-producing, then a mountain of unsold salmon would be a very visible feature.
The reality of the international industry, is that no country is over-producing. This negates the need for Producer Organisations at all.
22. If over-production is not the problem, then what is?
Both the Scottish industry and the consultants have confused the problem. Salmon farmers are not over-producing, and never have been. The real problem is one of localised over-supply. Simply, too many farmers are targeting their fish at exactly the same market, at exactly the same time. The presence of excess fish at market at the same time, then depresses the price.
The solution is to spread the harvest throughout the year, and aim it at different markets. This reduces the competition for market share and lessens the pressure on market price. Of course, there is a natural reluctance amongst many farmers, to forgo the traditional, lucrative markets, when prices are usually higher. However, as production continues to increase, the price peaks will start to even out.
To illustrate the principle, the extra 90,000 tonnes of Norwegian fish, produced during 1995, should be considered. Clearly, if 90,000 tonnes of extra production should come to market on one day, the market would completely collapse. This equally applies, should the harvest period covers just a couple of weeks. The market would have to deal with an extra 6,500 tonnes a day. However, if the harvest is spread throughout the year, the market would need to absorb only an extra 250 tonnes a day, not such an inconsiderable amount.
23. Can Producer Organisations deal with market over-supply?
As the mode of operation for Producer Organisations relates to the number of smolts put to sea, the Producer Organisation would have extend its' control over its' members, if it also wanted to regulate the flow of fish to market. This would be almost dictatorial control, which is not a function of the Common Fisheries Policy.
For both production and marketing to be regulated by the Producer Organisation, the PO would require total control over non members. Otherwise, the markets would be impossible to regulate. Such a suggestion goes far beyond the remit of the voluntary body, allowed under the Common Fisheries Policy legislation. This would eliminate any vestige of a free and open market.
It is therefore clear that over-supply cannot be regulated by the Producer Organisation, unless the price falls. This would enable the Producer Organisation to gain short term control, but only by the withdrawal process, which has already shown to be extremely costly and unworkable. In the fisheries sector, localised over-supply would end as stocks become depleted and markets further afield are exploited. This could not happen in the farming situation, because of the continuing production of more fish. This would be made even more difficult under EC rules, because once a system of withdrawal had been initiated, it could not stop within the twelve month time limit. Farming Producer Organisations would need to operate throughout the two to three year production cycle. As this is overlapping with new stock, it would be incredibly difficult to manage.
24. Can Producer Organisations be made to work for salmon farming?
The mode of operation, for any Producer Organisation, is largely irrelevant, if the fundamental concept itself, is flawed. The main reason that the presence of Producer Organisations would clearly have not prevented the recurring collapse in salmon prices, in either 1989, 1991, 1993 or 1995. Therefore, it is necessary to consider the thought process, by which the consultants, Ritson and Chamberlain, arrived at their conclusions. It will be then possible to discover whether it is the concept of Producer Organisations itself, or simply, the mode of operation, which is at fault.
25. How did the consultants arrive at their conclusions?
Professor Ritson, writing in his 1993 booklet, states that it was very predictable that the high prices achieved for salmon during the 1980's could not be sustained, which was why by 1991, following three years of depressed prices, the industry was in a state of crisis.
He suggested that the salmon industry resembled closely, a textbook example of a competitive industry, because i. there is a relatively free market and ii. there are a large number of small businesses.
Whilst it is true that the salmon market is relatively free, salmon farming cannot be described a being an industry of a large number of small businesses. There is actually a very diverse spread of business types. This was the just the case in 1991 as it is now.
However, it was wrong to base any conclusions on one specific view of the business types. This was because the type of farming company operating in Scotland was undergoing change and continues to do so. The largest companies can gain some advantage in the market place because they can produce salmon at a lower cost, than their smaller counterparts. This puts increasing pressure on the smallest businesses, who cannot compete. To survive, they must either integrate with the larger companies, making these even larger or integrate with one another.
The Scottish industry could not then and cannot now, be described as one of a large number of small businesses. In Scotland now, the production from 50 farms in Shetland is still only half that of one mainland company. The impact on the market of these many farms is therefore, becoming increasingly negligible. Eventually, the salmon industry will evolve into one of a small number of very large businesses, operating as individual companies or co-operatives. This change was predictable, well before 1991.
Professor Ritson goes on to say, that the development of the farmed salmon industry can be interpreted as the introduction of new cost reducing technology into a previously high cost industry. However, even this is not quite true. Certainly after 1989, farmers had to start to address the question of costs, but this was mainly through improved management, rather than being technology based. Reductions in stocking density had much more impact on cost reduction, than any new technology. This brought about improvements in growth rates and reductions in mortality.
26. So, salmon farming is a classic textbook example of a competitive industry?
Actually no, it is not. Having stated that salmon farming is a textbook example of a competitive industry, Professor Ritson, then contradicts his view.
He admits that the salmon farming industry does depart from the textbook case in respect of the number of years over which prices were sustained and the suddenness and extent of the price collapse.
The fact is that Professor Ritson has simply failed to appreciate the differences between the events of the salmon farming industry in 1989 and the wider agricultural sector, with which he is usually involved. He has made a fundamental error in assimilating the evidence, because he relied on his experience of the agricultural sector, rather than by looking at what really happened to the salmon industry.
When prices collapse in the agricultural industry, the blame can be usually attributed to over-production. This is because most examples of agricultural production represent mature industries. Production has usually reached a maximum average level about which there is some cyclical fluctuation. If prices rise, farmers try to produce a little more to gain some financial advantage, but when this extra production comes to market, the prices fall again. This situation continues ad infinitum, since demand for the raw food material is relatively stable, unless either a promotion is instigated, or there is a food scare, which then deters consumers.
Naturally, a Professor of Agriculture, who is asked about a price collapse in a food producing industry, will assume the that production and the market will follow all those other industries of which he has experience. This was exactly what happened, when he was asked to comment on the salmon farming industry. He assumed that salmon farmers must be over-producing, since this is the usual explanation for falling prices.
However, the salmon industry in 1989 was not, and still is not, a mature industry. It does not follow the typical displays of basic agricultural foodstuffs, such as beef and pork.
Salmon farming is still an industry in its' infancy and the recurring market disruption is nothing more than infant growing pains, aggravated by those farmers who wish to fight against such growth.
Yet, Professor Ritson fails to recognise this difference and accounts for the collapse in other ways.
27. How does Ritson account for the differences?
To account for this divergence from the classic examples, Professor Ritson claims that unusually, the technology induced expansion of production seems to have been associated with a non priced induced expansion of the market.
His view was that real prices declined only gently during the 1980's, fuelling a sustained expansion programme, whereas in a normal competitive market, a fall in market prices, would have discouraged investment at an earlier stage. He then notes that the long period of low prices since 1989 has been sustained longer than should have been expected, but he suggests that this may not be inconsistent with the experiences of the agricultural sector, which is prone to cyclical disturbances.
Again, Professor Ritson has tried to fit the experiences of the salmon industry to his preconceived model, rather than look at salmon farming as an independent industry.
28. What aspects of industry development did Professor Ritson fail to consider?
As previously mentioned, Professor Ritson describes the development of salmon farming as the introduction of new cost reducing technology into a previously high cost industry. This is a misinterpretation of the true development of the industry.
A common feature of all intensified aquaculture ventures, is that they produce high value species. This is necessary, because the cost of production tends to be high and the higher market price is essential to maintain farm profitability. Salmon farming is no different.
Salmon farming was perceived to be an attractive commercial proposition because the luxury status of the fish meant that high market prices could be obtained. The high selling price was required, to cover the high cost of production.
Prior to 1989, the salmon farming industry was permanently cost intensive. No attempt had been made to reduce the costs, simply because the farms were so profitable, that no one really thought to consider cost reduction.
It was the price collapse of 1989 and the subsequent loss of profitability, which started to focus the farmers attention on production costs, not the introduction of cost reducing technology, as suggested previously. After 1989, simple improvements in management made the most significant impact on cost reduction, although some new technology had been introduced. At that point in time, this was minimal and had little effect on profitability.
Professor Ritson also suggested the technology induced expansion of production seems to have been associated with a non-priced induced expansion of the market.
To some extent, this is correct. The market, and therefore production had expanded during the 1980's mainly fuelled by the general economic boom. The new wealth created a demand for all the trappings of luxury, including foods. Salmon farmers found that they could sell all that they could produce and expanded rapidly to satisfy the demand.
There is no doubt, that production would have continued to expand, even without the economic boom. However, it would not have occurred at such a rapid pace. This rapid expansion was the direct result of the increased demand for salmon at that time, ie a non-priced induced expansion. This was not associated with any technology induced expansion of production. In fact, the reverse is true. Farmers gave scant regard to excessive wastage and as a result, the cost of production remained high.
Professor Ritson also suggests that prices declined only gently during the 1980's which again, fuelled expansion. Any detected decline in market price, actually had little or no effect on expansion. The expansion of the industry can be singly attributed to the non-price induced expansion of the market, i.e. the demand for luxury products.
He also suggest that this continued expansion had lasted longer than expected. In a normal competitive market, falling prices would have deterred further investment in the industry. He still assumes, that the salmon industry is mature.
Every industry can exhibit distinct stages of development. These are infancy, growth and maturity. In many examples, maturity can also herald the end of the product life cycle. However, in the case of raw material food supply, this should never occur.
Professor Ritsons' interpretation of events and his possible solution to market disruption have been dictated by his view of the extent of industry development. Using the information presented by Chamberlain and Ritson, their view is clearly that the industry has reached maturity the events of 1989 are the beginning of the price and production cycles, which are an inherent feature of the agricultural sector whilst the true state of industry development in 1989 can actually be much better described as still being in its early infancy.
29. So, if the industry was still in its' infancy in 1989, what happened to cause the market disruption?
In 1989, the salmon farming industry was experiencing rapid growth, but because of the expansion of demand, little attention had been given to marketing. The price collapse, was a function of this apparent lack of marketing effort as the market became saturated. This does not mean that the industry was over-producing, but rather the localised market had been over-supplied.
Without the safeguards provided by active marketing, some aspect of the industry had to give. The result was a collapse in the price. However, this collapse was not a simple fall in price. Instead, the industry underwent a significant change.
Simply, what happened was that, the volume produced exceeded the amount of product, which could be absorbed as a luxury item. The price collapse heralded a change in industry production from one of high margins and low volumes, with a product aimed at the luxury market, to one of low margins and high volumes, producing a commodity food.
In effect, the product life of salmon farming, as originally conceived during the 1960's, came to an end and a new product replaced the one previously dominating the market place. Salmon coming to market after 1989, should be actually considered as being very different, to that of 1989 and before, almost a different product altogether.
30. Does Professor Ritson present any data, to confirm his views on industry development?
Writing in his 1993 booklet, Professor Ritson says that his 1991 report, seems to have been the first time that the possibility that the salmon industry might subscribe to the conditions of long term cyclical behaviour had been articulated formally. Although, he claims that some producers had already been using the terms boom and bust. He then goes on to say that this suggestion grew out of the argument that the salmon industry resembled more closely livestock production, than the fishing industry.
He then tries to say that he did not intend to suggest that it was an established principle that salmon production would exhibit cyclical behaviour, since cyclical behaviour is something which cannot be yet proved. For example, the cycle may be extremely long or it could be complex in nature.
Simply. he is trying to extricate himself from a view, which two years on does not seem to be appropriate to the salmon farming industry.
He concludes that a free market for salmon is likely to be the subject of high and depressed prices, measured over a period of years. There are however, complicating factors and the term cycle should not be interpreted to imply a regular pronounced pattern. He says that the market is cyclical, in that part of the price stability, is the consequence of production plans responding to market prices.
Unfortunately, his attempt to limit his explanation of cyclical behaviour to prices, is undermined by his cyclical production forecasts.
A projection for production between 1991 and the year 2000 clearly illustrates the anticipated production cycle.
Production forecasts (x 1000 tonnes), showing cyclical behaviour. (from Professor Ritson. The behaviour of the farmed salmon market in Europe. A review.)
Anyone with any current knowledge of the salmon farming industry, can see that these forecasts are totally unrealistic.
By 1993, Professor Ritson seems to have back tracked on his view of production cycles and restricted his comments to those cycles, relating to price.
Yet, the actual average price figures, in the same format used by Professor Ritson, shows, that since 1989, prices have actually stabilised. Admittedly, the variations shown have been caused by the recurring market disruption, but it will be impossible to obtain a totally stable price. Even Professor Ritson shares this view.
31. So, if Professor Ritson failed to interpret the events of 1989, is his solution to the market disruption still relevant?
Professor Ritson expressed the view, that a well managed fish farming business should achieve long term profitability. However, he also believed that the future would be characterised by a greater degree of price instability. This would be manifested as a cyclical element to the market.
To control this instability, Professor Ritson proposed using measures within the Common Fisheries Policy to manage the market more effectively. This market management was developed into the concept of Producer Organisations.
However, as it is clear that if the industry is not exhibiting unstable cyclical behaviour, then it is also questionable whether Producer Organisations would be able to exert any influence over the future development of the industry. i.e. why try to stabilise something, which is not unstable.
32. Whilst Producer Organisations appear inappropriate for the industry, why have Scottish producers continued to pursue this strategy of production control?
The salmon industry may not be exhibiting either over-production, nor cyclical behaviour and therefore, Producer Organisations may not be the most appropriate solution. However, the Scottish industry continues to demand the formation of Producer Organisations, because it suits them to. A network of European Producer Organisations may not solve perceived problems of over-production, but they will address the current industry under-marketing as well as enabling the Scottish industry to persist with their own aspirations for the salmon market.
The Scottish industry want to see the formation of Producer Organisations, because it will help them retain their special vision, for the salmon market.
Prior to 1989, Scottish salmon was perceived to be a premium product, with a higher market value than any other salmon. This market positioning was built on the Scottish image, as found in other food and drinks, ie, Aberdeen Angus beef, Scotch whisky etc. How much of this perception was simply image and how much can be attributed to real measurable quality differences, is questionable, but certainly the industry benefited from this market perception. This was because the market paid such high prices for the finished product.
During the 1980's pricing was not an issue, because every salmon produced found a ready customer, willing to pay the high market prices. However, when the demand for high priced salmon, reached saturation, price then became a problem.
Under normal trading conditions, increasing volume always has a negative effect on prices. Consumers of luxury products, are usually prepared to pay a higher price, only because the product has a rarity value in the marketplace. If the product becomes widely available, as production increases, then consumers are not so willing to pay a premium price, and hence prices fall.
Using an example from the motor industry, customers of Rolls Royces would not pay such a high price for their cars, if they were made in the same volumes and by the same mass market production techniques, as for a Ford Escort.
The Scottish industry, hoping to benefit indefinitely from the Scottishness of their product, suddenly found that its' image was being undermined by the availability of volume production of salmon from other countries, especially that from Norway. Unfortunately, as consumers were unable to detect any difference between a Norwegian salmon and one from Scotland, they were reluctant to pay the higher price demanded for Scottish fish. As a result, and much to the disgust of the Scottish industry, the price of Scottish salmon fell into line with other salmon. Scottish salmon therefore, became indistinguishable from any other salmon and they lost the benefits of their image.
Logical reasoning suggests that, if excessive volume undermines the price and image of Scottish salmon, then any contraction of international production would enable Scottish salmon to regain its former position. Such a contraction would only occur if the international industry agreed to such controls. As a first step, an obvious vehicle to implement cross European production controls would be the system of Producer Organisations, proposed by Professor Ritson.
It is this limitation, on their marketing activities, and not the intention to minimise cyclical behaviour, which is the main rationale for the continued pursuit of the Scottish strategy to establish Producer Organisations.
33. What is the Scottish strategy?
The Scottish proposals were that each industry form a recognised Producer Organisation. In Norway, there could be more than one, reflecting the larger size of the industry there. Each Producer Organisation would have a representative who would together form a voluntary working body, The European Salmon Industry Forum. This in turn, would appoint an independent consultancy company who would monitor the salmon market. Based on their findings, the ESIF would determine the level of future salmon production. This body would allocate a production quota for each producer Organisation, which would then spread this allocation through their membership.
The theory would be that by linking production to the market, prices would be stabilised, ending the continued market disruption. Equally, the Scottish industry could see these controls as a way of restricting production, to enable them to regain a premium image for Scottish salmon.
34. How have the Scottish industry pursued this strategy?
Once the proposals had been passed from Marine Harvest to the executive of the Scottish Salmon Growers Association, the SSGA began to approach other European salmon farming producers to persuade them of the benefits, which could be gained by adopting this system.
In July 1992, an extraordinary general meeting of the Irish Salmon Growers Association voted 14 to 0, with one abstention, to pursue discussions towards the formation of an Irish Producer Organisation.
In August 1992, a general meeting of the Shetland Salmon Farmers Association decided to proceed with the formal incorporation of the Shetland Aquaculture Producers Association Ltd. Preliminary discussions had been underway since May 1991.
On August 17th, following preliminary discussions earlier in the year, 178 Norwegian salmon farmers voted to establish a Norwegian PO. 27 farmers of the 206 attending the meeting said no. This was out of a total membership of 580, with only 450 actually paying fees.
During November 1992, the SSGA announced that the Scottish PO, which was then being set up, is to be called the Scottish Salmon Producers Ltd. This was despite the fact that the Scottish industry had not yet voted in favour of the formation of this company. This vote was not taken until early in 1993, when Scottish farmers then said yes to POs. In an industry poll, 83% (78) of farmers, representing 77% of the industry voted in favour of POs. The choice was just yes or no.
In September 1992, the inaugural meeting of the European Salmon Industry Forum took place. This voluntary body, was established to coordinate the collection and dissemination of production and marketing statistics, against the background of a Europe wide system of Producer Organisations. It comprises of representatives of salmon farmers from Norway, Scotland, Shetland, Ireland and the Faroe Islands.
35. The Scottish industry appear to have gained widespread support for their proposals from farmers, but what about from politicians?
Whilst, the formation of Producer Organisations are permitted under EC rules, the process of formation must be monitored and approved by the Member State. The Scottish industry have not received such support from the British government. The concept had been explored with the Scottish Office soon after the proposals had been put forward. However, discussions, between the SSGA and the Department for Fisheries, always reached a stalemate over a single issue. This related to the industry demands for an Extension of Discipline. The Governments view was clearly stated in Parliament (HC Deb 5 May 1993 c164w) by the then Fisheries minister, Sir Hector Monro:
"I have welcomed the salmon farming industry's proposals to establish producer organisations. These will help create a more stable and better informed market. However, I do not accept the industry's case for giving such organisations compulsory powers to determine stock levels and minimum prices for members and non-members.
This has since remained the Governments view.
The Scottish industry have been unable to appeal to the EC for assistance, since the power over Producer Organisations clearly lays with the Member State under EC rules.
The SSGA could only ask the EC to amend the current rules and regulations, as they claim that these were more geared to fish catching than fish farming.
The Scottish industry also had another problem to overcome at the political level. Norway was not a member of the EC although negotiations on their entry were underway at this time. It was unclear as to how EC rules could be applied to Norwegian farmers, if they remained outside the EC.
36. What was the Scottish reaction to such opposition to the Extension of Discipline?
The then Chairman of the Scottish Salmon Growers Association working party on Producer Organisations, David Windmill, gave a presentation to the Scottish Fish Farming Conference in February 193 and again later that year at Aqua Nor in Norway. This was the first real opportunity for the wider public to hear the views of the Scottish industry on the issue of Producer Organisations.
The paper, entitled "The value and aims of Producer Organisations" clearly states the SSGA position on a voluntary system, which they do not believe will work. However, a compulsory arrangement will require an Act of Parliament, which will never be forthcoming, simply because of the relative unimportance of salmon farming to the UK economy.
The SSGA clearly believe that compulsory Producer Organisations are the only solution to continued market disruption. Mr Windmills frustration with the Government and other critics of the concept can be seen in the following comments.
"The system has its critics and yet all of them - from senior politician to junior pundit - have one thing in common. While they all agree that we have a problem, no-one but the fish farmers themselves have even suggested a solution. We would have more respect, certainly for the politicians, if they were to be positive, imaginative and constructive instead of critical and negative in their approach."
He went on to say that "this is not just the best show in town, it is the only show in town.
These comments should be considered, in the light of later developments.
37. The Scottish industry appeared to have reached an impasse, what was their next move?
Not long after presenting his views at the two conferences, David Windmill presided over a massive increase of Scottish grilse. The presence of these fish on the market, undermined salmon prices, heralding yet a further price collapse.
The outcome of this price collapse was that the Norwegian industry started to believe the Scottish industry claims that Norway was responsible for the continued market disruption. Mr Crowe, Chief Executive of the SSGA reported that Norway appeared to be well on the road to accepting POs. At the NFF AGM, 90% of votes were in favour of some form of supply management. The Scottish and Norwegian industries were felt to becoming to the same conclusion, albeit from slightly different angles. This ignored the fact that the NFF had voted to pursue POs, two years previously. The problem for Norwegian producers was that the vote was not representative and subsequent events had brought about an ever changing view, as to the viability of this strategy.
However, despite this seeming willingness to discuss Producer Organisations, the Scottish industry had to still overcome Government opposition to the demands. Whilst, they had managed to obtain the support of some individual local MPs and MEPs, they had no influence on the Government, especially as they represented the political opposition.
The MP for Shetland suggested that the SSGA should approach the cross party Scottish Affairs Committee and try to gain their support. Whilst, this Committee had no direct support over the Government policy, its' support would provide a much stronger argument to take to the Government.
The SSGA and SSFA presented their views to this committee of Scottish MPs, on 19th October, 1994.
About the same time, the SSGA had managed to gain another unexpected ally in their pursuit of Producer Organisations. Speaking in Scotland, Mr Olsen, the Norwegian Minister for Fisheries said that Norway would put a system of Producer Organisation in place. He said that this would happen irrespective of whether Norway joins the EC or not.
38. What was the outcome of the Scottish Affairs Committee investigation?
Despite an impassioned plea to the Scottish Affairs Committee, the recommendations were not in favour of the formation of Producer Organisations.
In effect, the Committee expressed a number of reservations about the potential impact on market structure, conduct and performance of the establishment of Producer Organisations with Extension of Discipline and some practical reservations as to their likely effectiveness in regulating the impending production surge over the coming years. They saw POs as anti-competitive and acting against the interests of the consumer.
The Committee, instead recommended a strategic shift in marketing activity, so that the industry engage in a programme of market expansion and innovative product development.
39. What was the industry response?
During their submission, the then Chairman of the SSGA, Jim Payne told the MPs that they were very much hoping with the help of the Committee, to persuade the Government to support the industry with POs and an Extension of Discipline, without any reservations.
When it was clear that this assistance was not forthcoming, the Chief Executive of the SSGA, William Crowe, told the press that the Committee did not fully understand the EU regulations and the whole concept of POs.
Since it was the SSGA themselves who explained the concept to the Committee, then maybe they have only themselves to blame. The reality is that those from outside the industry have a much clearer view as to the viability of Producer Organisations, since they lack any preconceptions. Their views could therefore, be more relevant in deciding whether Producer Organisations are the solution to the industry problems.
It is also worth considering the full recommendations of the Committee. This should be viewed against the comments made by David Windmill at the Fish Farming Conference in 1993, in which he said that the industry would have more respect for politicians, if they were to be positive, imaginative and constructive. How much more positive, imaginative and constructive do they need to be in order to avoid the comments from Mr Crowe, in which he said that the Committee did not have sufficient expertise to draw on when examining some of the submissions.
40. Meanwhile, what was happening in Norway?
In May 1995, the Norwegian Government published a white paper, in which it will laid out its proposals to deal with the continued market disruption. The Minister delivered instruments, which would enable POs to be set up.
Having failed to convince the Scottish Affairs Committee to support their aims, William Crowe thought he had found an ally in Mr Olsen. Mr Crowe responded saying that the Scottish industry would proceed quickly, if the UK Government granted an extension of discipline. This was an unrealistic statement especially as he knew that the Scottish Office had made their views clear on an extended discipline.
Mr Olsen had been holding secret meetings with the SSGA to discuss Producer Organisations, which some Norwegian farmers saw as disloyal. Despite significant reluctance on the part of many of his farmers, Mr Olsens' aim in pursuing a move towards Producer Organisations was actually understandable.
Firstly, as the major source of complaint about Norwegian farmers came from Scotland, any form of collaboration with the SSGA might convince them to stop their complaints.
Secondly, if Norway could be seen to working towards Producer Organisations with Scottish farmers, then the EC may be persuaded to delay any future action against Norway. Mr Olsen was faced with the increased likelihood that the EC may imposed high tariffs against Norwegian salmon, which would effectively exclude them from the European market. Such collaboration on Producer Organisations could be seen as a form of appeasement against the Esther formation of Producer Organisations might be viewed as the lesser of many evils and therefore Mr Olsen adopted his position, favouring Producer Organisations.
41. Which options remained available to the Scottish industry?
With no likelihood of agreement forthcoming from the Scottish Office and with Norway remaining outside the EC, the Scottish industry were left with little choice.
During July, 1995, Mr Crowe announced that the PO working group has taken a decision to form a voluntary Producer Organisation. He said that in the absence of anyone coming up with another plan, the SSGA saw this as self preservation.
In August, the SSGA held a series of road shows to inform the industry of their plans and to recruit members for the Producer Organisation. Mr Crowe reported a positive and encouraging response to the proposals to form a PO. However, private reports suggest that the physical response to the meetings was poor with a maximum of 11 farmers turning up at one and only three, at another.
Despite this supposed poor response, Mr Crowe has said that some 30 companies are expected to sign up immediately. SSGA chairman Philip Thorn said that he hoped that the PO would be in place by October.
The proposed system comprises of two strands, Producer Organisations and the European Salmon Industry Forum.
The European Salmon Industry Forum has been in existence since 1992, but its' activities have yet to be publicised. Its' make up is planned to consist of a representative from each Producer Organisation.
The SSGA suggest that each Producer Organisation will have an equal voice on the ESIF, however, they anticipate that there will be one PO representing Ireland, one from Scotland, one from Shetland, one from the Faroes and perhaps five or six from Norway. In terms of majority voting, the non EC members can out vote the European Community members on every issue. Therefore, Norwegian producers can retain their dominant position in the European market. The current situation will therefore, remain unchanged and Producer Organisations will have no influence.
The ESIF is to provide a reliable forecast of market demand and assess the likely out-put of national harvests. To do this the ESIF will appoint independent consultants to provide regular surveys of the international markets and the likely output of the industry. This information is to be supplied on a six monthly basis.
However, the mechanism of this proposal has not been really considered. It is extremely weak for three key reasons:
1. The Scottish Salmon Board, the dedicated marketing arm of the SSGA, has been active within the international salmon industry for several years. It is clear from their activities that they are unable to anticipate even changes in demand and supply in their own market. For example, during November in both 1994 and 1995, the SSB has run the Scottish Salmon Festival, a month long promotion in the UK.
This promotion has failed and has been dropped for 1996, to be replaced by a week long Italian food promotion. The reason why the festival failed was that the SSB were only able to supply fishmongers with Tartan Quality Mark salmon of 5 kg plus, when the consumers wanted to buy fish of a maximum 3 kg. Naturally, farmers were growing their salmon to the largest possible size as demanded by the smoking industry for the pre Christmas market and these were unsuitable for the retail trade.
If the SSB cannot read the market on a relatively local basis, how will a part time independent consultancy be able to provide an accurate picture of the salmon market and then link it to production.
The problem is compounded by the fact, that the market is continuing to grow. Despite claims of over-production, demand has kept pace with production, partly fuelled by the lower market prices. Will the consultants be able to link production to market price? This is unlikely.
2. A six monthly forecast can only consider at generalisations. How can a consultant predict at what size the fish will be harvested. The farmer must take advantage of the markets as they develop, and may decide to sell the fish at a small size, or equally he may decide the market has changed and it is worth retaining them to grow on to a larger size.
The current problems, affecting the market relate more to localised over-supply, rather than specific over-production. This is impossible to forecast, and unless the POs are able to regulate the volume of fish to market on any given day, impossible to control, irrespective of the controls put on smolt placement.
3. The market for which products, is to be considered by the consultants. The Scottish Affairs Committee report accuses the Scottish industry of holding on to the idea that salmon can only be sold as fresh whole fish. The market has evolved, since the early days of the industry. The market is also, still undergoing change.
It is clear that the market for fresh whole fish is declining as more salmon is sold as processed or as secondary processed added value products. Within the last three years, the market for added value, processed products has increased dramatically. In the UK, the availability for such products has increased from two to over 50. Will the consultants include the market for these products, or will they simply look at sales of the raw material.
Should the consultants look at fresh whole fish only, then there is an obvious danger that the market will be significantly underestimated. Yet, the international markets are so complex, that it will be more than a permanent job to keep track of market development.
However, if every product is considered, there is a danger that the consultants report will undermine the marketing activities of individual companies and possibly even restrict novel product development, since all confidentiality will be lost.
It is clear that the consultants role will be all powerful and enable them to dictate the development of the whole European salmon industry. It is questionable whether there is any independent consultancy capable of this role, who would be acceptable to all salmon farmers.
43. Is the system workable at farm level?
The SSGA proposals lay down the rules, to which members must adhere. However, the proposals do not state as to who is eligible to become a member and who is excluded. However, it is clear that the membership is restricted to only on-growing companies.
This means that all hatcheries and smolt producers are excluded from membership, which obviously has grave implications for the future welfare of the industry.
Simply, how can a system, which is dependent on the controlled supply of smolts, exclude those farms which are responsible for the production of these smolts. Obviously, if the Producer Organisation decides to restrict smolt placement, then smolt producers will have no say on the matter nor will be able to gain any compensation to cover the fact that they will have excess smolts that they are unable to sell.
For example, should the consultants decide that the market is over-supplied and recommend stringent cuts in production, it will be the smolt producers who will undoubtedly suffer. Many could be forced out of business, as demand for their production falls and they are left with smolts that they are prevented from selling. This surely, will threaten the whole future supply chain of the salmon farming industry.
44. What about those farms who refuse to join the Producer Organisation?
According to the SSGA, the proposals include an Extension of Discipline. This means that the Producer Organisation, which is supposed to be voluntary, would be given mandatory powers. This proposal appears to have been included even though the UK Government has refuse to grant such powers.
Under the Scottish proposals, non-members would not only be forced to agree to production controls, they would also be obliged to contribute to the costs of such controls.
45. Have the SSGA obtained total support for their proposals?
William Crowe has indicated that companies representing 99% of SSGA production have signed up to join, It has been suggested that this equates to only about 30 companies, or less than half the number of the total number of farms in Scotland.
Mr Crowe can claim such high level of support, because he has included only the on-growing companies in his membership. With Marine Harvest McConnell producing about 25,000 tonnes, this one company represents over half the production referred to. This is not representative of industry support, as can be seen by the list of sponsors.
With such a high level of support, the SSGA have sought recognition from the Scottish Fisheries Minister. They anticipated that the PO constitution would be agreed by October and the PO up and running by November 1995.
46. Has the Scottish Producer Organisation gained recognition from the Scottish Office?
At the time of writing, in November 1996, the Scottish Producer Organisation has still failed to attain official recognition from the Scottish Office. Discussions are reported to have reached a stalemate. The obvious sticking point is the inclusion of the section on the Extension of Discipline, to which the British Government will not agree. The SSGA have now apparently amended their demands but have not, as yet, released the details to their membership
47. Is the question of the Extension of Discipline, the only hurdle to overcome?
The extension of discipline is not the only unresolved question. Prior to the launch of the SSGA PO, the Shetland Salmon Farmers Association appointed a new Chairman.
Mr John Tait expressed the view that the associations should not dictate to their members how many smolts can be put to sea. As this is the basis of Producer Organisation policy, it must bring into doubt the commitment of all the farmers associations, to this strategy.
In addition, and even more significantly, after the announcement about the Scottish PO, a group of Scottish farmers launched a rival Producer Organisation. These farmers claimed that the SSGA did not represent their views on production control and that there was a need for a second Producer Organisation to increase Scottish representation on the ESIF.
48. Discussion on Producer Organisations seems to have reached a stalemate in Scotland, what about those in Norway?
By February 1996, the Norwegians had shown some progress towards the introduction of Producer Organisations. Legislation had been drafted and was under discussion by the Norwegian Parliament. The Minister met industry representatives to discuss the proposed system.
William Crowe, of the SSGA, said that this was encouraging, but he did not believe that these discussions would not solve the then market disruption. Whilst, the SSGA welcomed Norwegian support for POs, some Norwegian farmers were becoming increasingly opposed to the concept. The industry requested that the Minister postpone his legislation whilst they commission a full investigation of all the available options.
49. So, what is the position regarding the formation of Producer Organisations, at present?
The pursuit by the Scottish industry to establish a network of Producer Organisations appears to have stalled. Discussions about the recognition of the voluntary Scottish producer Organisation have reached a stalemate over the issue of Extension of Discipline, which the Scottish Office refuses to grant.
There is the view that, having failed to achieve to convert the Scottish Office to their view, the SSGA have continued with a strategy of whingeing and whining, aimed at market destabilisation. This might encourage the Government, the EC and the Norwegian authorities to support their measures. However, there is no proof to suggest that this is the case other than the view of the PO working party chairman, who said privately, that the current dumping complaint negated the need for Producer Organisations.
The Scottish industry could believe that, if a positive result from the dumping complaint is obtained, then the threat of action may be sufficient for the Norwegian authorities to agree to their demands. This in turn, may convince the Scottish Office to agree.
Equally, the Scottish industry could believe, that having waited for over four years to get as far as they have, it may be worth waiting for another year, in the hope that the forthcoming elections may bring about a change in Government. Whilst, opposition MPs often express concern about the industry, there is nothing to suggest that once they are in power, other more important issues push the issue of the salmon industry to the end of the queue for policy changes. It should be remembered that the Scottish Affairs Committee is a cross party committee and includes members from the opposition, who all agreed to the recommendations.
The Scottish industry may also be waiting for the outcome of the Norwegian investigation. Having had some success in converting the Norwegian Fisheries Minister to their view, albeit for dubious reasons, the Minister has now resigned. The position, of his replacement, on Producer Organisations is still unclear. Therefore, the results of the investigation are important to the Scottish industry.
The outcome of this investigation cannot be prejudged, but it is clear from discussions with many other experts working in the wider agricultural and food sectors, that once the emotive involvement is stripped away and the true logic of these proposals are analysed, they make little sense, since they simply restrain a vibrant and growing industry, exhibiting enormous potential.
However, the likelihood is that the concept of Producer Organisations will not leave the drawing board. There are simply too many hurdles to overcome.
50. In the extremely unlikely event that Producer Organisations are established, what will be the outcome?
This is the great unknown. There are however, a number of scenarios, which will depend on the final arrangement of the Producer Organisations. These factors include:
1. The actual briefing given to the consultants. Will this cover all salmon products, or simply be restricted to whole fresh fish.
2. The competency of the consultants and their understanding of both the industry and the markets.
3. The make up of the European Salmon Industry Forum. If each member has an equal vote, how are national issues to be resolved. Under current proposals, the Norwegians will out vote Community producers on every issue.
4. Whether the Producer Organisations are voluntary or mandatory.
5. The power of the European industry to prevent imports from non European sources. The industry has discounted Chile as being able to influence the European market. This is a gross under-assessment, which only considers the possibility of imports of fresh whole fish. It is unlikely that the Chileans would now even contemplate such exports. Instead, if they wanted to export fresh salmon, they would do so as deboned fillets.
The range of possibilities as to what might happen if Producer Organisations are introduced, is vast. However, three of these possible outcomes are as follows:
A: The consultants see that salmon is actually under-marketed and that the potential is still unexploited, provided that the industry expand the market through product development. They recommend that the industries continue to expand freely, each to its' own ability. This is no different to the current free market and therefore the need for Producer Organisations is negated, and simply another unnecessary expense.
B: The Scottish industry have, mistakenly, claimed that the market is only expanding at 10%. The consultants because of their restricted briefing, agree. They then recommend that the industry should only expand at the same rate. The ESIF lay down a mandatory limit, which is enforced by the individual Producer Organisations. Since, the market has been grown by many of the processors, who see the availability of salmon as a incentive to supplement wild caught white fish products with those made from salmon, these processors will find either salmon availability decline or prices rising. Both are equally a disincentive to use salmon and the market will shrink in response. The ESIF, will then need to place further restrictions on expansion to compensate. Alternatively, the processors will turn to sources from outside Europe, which will then destabilise the market further.
C: The consultants believe that the expansion of production has destroyed the special image of salmon and recommend that production should be curtailed to enable producers to regain this image. Mandatory controls restrict the future smolt placement so production is reduced. This has the immediate effect that the existing demand for cheap salmon will disappear. Unfortunately, many farms will become unprofitable as all production costs rise to compensate for the lower volumes. The effect is that prices rise, but profitability diminishes. This does not take into account those producers, who have managed to obtained a niche market for themselves. They would find that they would be unable to maintain their contracts simply in response to the inefficiency of other producers.
The European industry will shrink as many of the producers, especially those of smolts, face closure. However, unless strict controls are put in place against imports, the market demand for salmon will suck in floods of cheaper imports.
Non of these outcomes actually favour the European industry and it is difficult to even think of one, which would.
51. In the unlikely event that Producer Organisations are formed, what methods of control, could they impose?
There are really only three options as to potential control measures. These are:
1. Control of the placement of smolts of sea. As already discussed, restricting the smolt placement has absolutely no influence on possible market disruption. Even if smolt placement was reduced from present levels, there is nothing to stop all the resultant fish from being harvested on one single day. This would cause total chaos.
2. Control of growth rates. The Norwegian authorities are currently restricting growth rate by limiting the amount of feed which can be fed. Whilst, this may restrict the space at which the fish reach harvest size, it does not stop all the fish from being harvested on one single day and therefore does not control market disruption. In addition, the slower growth rate, results in increased production costs and reduced the competitiveness of producers in the marketplace.
3. Salmon is controlled at harvest. This would involve either restricting the release of fish to market or withdrawal of fish if the market is in danger of over-supply. The experience of the agricultural sector shows that this is an extremely costly way of regulating the market. This is especially so, when the product concerned has a relatively short shelf life even when frozen, as the Norwegian industry found to its' cost in 1991.
All three methods of control illustrated, will not provide the solution to the recurring problems of the salmon industry. The answer must be found elsewhere.
52. Are there any other solutions to the problems of the salmon farming industry?
The Scottish Salmon Growers Association have repeated stated that there are no other solutions to the problems of the salmon industry, but those put forward by the Scottish salmon industry itself. Their position, is made clear, from the comments made by David Windmill at the 1993 Scottish fish farming conference, and often repeated in the fish farming press by the Chief Executive, William Crowe.
The suggestion that Producer Organisations are the only solution, which have been proposed, is nonsense, but the SSGA can be truthful, in stating that they are not aware of any other solution, by the fact that they simply refuse to discuss the matter outside their own organisation.
The industry is therefore, left with a short term policy of EC mediated Minimum Import Prices, which can be circumvented and a long term strategy of production control. Together, the imposition of higher tariffs and the possible formation of Producer Organisations, are seen as the only way to resolve variations in price.
However, at least one other solution has been proposed. This will provide a simple answer to the recurring market disruption.
53. What is this alternative solution to the industry problems?
Any solution, must address the actual problem affecting the industry.
54. What is this problem?
The recurring market disruption, which continues to plague the industry, can be best described as being due to "Too many farmers continue to aim too many fish at exactly the same markets, at exactly the same time".
55. Why is this a problem?
The Scottish industry claim that international salmon farmers are over-producing. What this actually means is that the traditional market is saturated with salmon and the increased competition that this creates, forces the price down, Basic economic principles clearly show that as volume production increases, the price falls. This is exactly what has happened, within the traditional salmon markets. This is not over-production, but saturation of the established markets. There is a major difference between the two.
56. Why has market saturation occurred?
The salmon industry has been built on the established view of salmon as a luxury fish. This has meant that all salmon farmers have aimed their production at the traditional markets. Prior to the inception of salmon farming, salmon were typically available from February through to the end of the summer. Salmon were seen as the food of summer "season". There was also a traditional market for smoked fish for the Christmas market, but many of the fish originated in North America and were smoked in Scotland.
Naturally, salmon farming enabled farmed produce to supplement, and eventually, replace the wild caught salmon used in these traditional market. As production continued to increase, these markets became saturated. This was the situation in 1989, when the price finally collapsed.
57. Is market saturation not the same as over-production?
When salmon farmers start to over-produce, then the result will be the appearance of stockpiles of unsold salmon, with the prospect of no potential sales. These stockpiles will remain until production is curtailed and the stockpile used to supplement the reduced production. Alternatively, the existing market can be expanded or further developed, to absorb this excess production.
58. So, if the market is saturated, how has production continued to expand?
In 1989, the price collapse changed the nature of the industry. Overnight, it evolved from an industry of high margins and low volumes to one of low margins and high volumes. Salmon metamorphosed from being a luxury product to one of the commodity markets. This transformation meant that the market itself underwent change and without any specific market effort, the whole market expanded. Economic principles clearly show that reductions in price, increase the size of the available market. Therefore, after the price collapse, suddenly, the market opportunities were much greater.
59. After 1989, were farmers able to take advantage of the expanded market?
After the 1989 price collapse, the industry was in disarray. The immediate effect was that every farm lost its' profitability. The cost of production was in excess of the selling price and the future looked gloomy. This was the situation when the Scottish industry submitted their first dumping complaint to Brussels. The industry was then faced with two possible courses of action.
1. It could be assumed that, since the industry was profitable prior to the price collapse, then a return to the situation prior to 1989, would enable the industry to regain its profitability. The aim would be to force the industry back to a position in which it was producing lower volumes, but receiving higher margins. The intent would be to enable salmon to regain its former position as a luxury product. The difficulty would be that, once a product has lost its luxury image, it would be almost impossible to regain, whilst the product remains available to the consumers.
2. The alternative strategy is to try to capitalise on the low prices and regain profitability by continuing to expand the volume produced, whilst at the same time, reducing the cost of production to below the selling price.
The difference between these two strategies can be illustrated mathematically by the following equation:
1. Production of 100 fish with a profit of 10 units each, gives a total profit of 1000.
2. Production of 1000 fish with a profit of 1 unit each, gives a total profit of 1000.
The acceptance of a lower margin, together with a significant reduction in production cost, can produce similar levels of profitability.
60. Which strategy have salmon farmers followed?
Since 1989, all salmon farmers have pursued the same goal. This is to attain a reduction in the cost of production to below the selling price and so regain their lost profit margin. This has been the only course of action open to them, since it would have been impossible to convince any farmer to take the opposite approach. No farmer would be willing to curtail his production when the future of his business was at stake.
Fortunately, farmers have had plenty of scope to improve their production costs, as prior to the collapse of prices, these had been artificially high. This was because profits had been so great, that any potential improvements in margin, which could have been attained, were considered negligible. Farmers had been too busy reaping the rewards, to consider such issues as production costs. This is why mortality rates were often in excess of 40% and feed was regularly wasted through inefficient administration.
Since 1989, production costs have been drastically cut and this is reflected in the official annual cost figures released by the Norwegian Department of Fisheries.
Whilst, specifically targeting a reduction in costs, farmers had also realised that they could benefit from an economy of scale and therefore production has soared.
The overall picture of the industry, since 1989, is one of diminishing costs and increasing production. Yet, against this background, the Scottish industry has been demanding the opposite scenario, i.e. that production should be cut and prices pushed upwards. This has resulted in the conflicting messages which have confused the market and caused the continued market disruption.
61. If the market had become saturated in 1989, how could production have continued to increase?
As previously stated, the industry underwent an evolution in 1989. This change should not be underestimated. The most significant outcome was that salmon prices were much lower. This created a whole brand new market, which the industry has continued to exploit. Lower prices have had a direct effect one sales, which have kept pace with increases in production.
62. If the lower prices have created a new market for salmon, why has the price continued to show significant and sudden variations?
Firstly, even though the market has, and continues to expand, this will never be a smooth process and it is inevitable that at times, the market will be over-supplied. After all, the capability still exists for too many farmers, to supply too many fish, to the market at exactly the same time.
Secondly, market disruption will remain a feature of the salmon farming industry, whilst sections of the industry continue to issue dire warnings of likely market disruption. These only undermine market confidence and inevitably exhibit a knock on effect on prices. If these merchants of doom and gloom started to talk up the industry, instead of being so negative, they may find that buyers respond in a much more positive way.
Thirdly, although the industry is engaged in some marketing efforts to further expand the market, these marketing activities still reflect the previous image of salmon. Salmon are now supplying a totally different market to that of before and the marketing efforts should be adapted to take the new markets into account.
Finally, despite the claims by the Scottish industry that they need stabilised prices in order to remain profitable, no other food producer can depend on a stable and predictable price. In the mature agricultural sector, price swings are a regular feature of the industry. These are linked to the relationship between supply and demand. No form of intervention really provides a solution to this continuing problem. In those sections of the industry, which do receive support, farmers are usually critical that payments are too low. Unfortunately, these farmers are supplying a world commodity market and can do little to alter their position.
However, salmon farmers could do more to help themselves address the problem, instead of looking to the politicians for solutions.
63. What can salmon farmers do to change their situation?
It was clear in 1989, that whilst the industry claimed over-production, the underlying problem was under-marketing. The industry must move away from its' production led philosophies, i.e. to produce what the market believes it wants, to one which is more market led, i.e. producing exactly what the market wants.
64. How can this be illustrated?
The difference between an inward looking, production led industry and one which is outward looking and market driven, can be simply illustrated.
A farming company, which is production led, might adopt a decision process, similar to:
Salmon have a high value.
Lets' grow them.
Lets' produce 250,000.
Lets' charge £10/kg
Lets' sell them.
By comparison, a market led company, would adopt the following approach:
Lets' investigate the market for fish.
Lets' see if we can produce the fish that consumers want.
Lets' see what consumers will pay for our fish.
Lets' see if it is profitable to grow them.
Lets' grow these fish.
65. But, surely the industry has investing in marketing?
The Scottish industry certainly has a marketing budget. The Scottish Salmon Board, which acts on behalf of 14 companies, had a marketing budget of about £1.7 million during 1995, half of which, comes from British tax-payers. This money used to underwrite the Tartan Quality Mark scheme and pay for a small number of promotions.
However, these promotions do little to expand the market, since they still focus on a preconceived idea of salmon. The main market growth can be attributed to the widespread availability and value for money price of salmon.
66. So, what should be done to develop the market?
The answer must be drop the preconceptions of the industry and to return to first principles. Salmon farming can then be re-evaluated as a market led industry using all the tools of the marketing sector. The problem is that many farmers are not really aware of the potential benefits which can be gained by using marketing. Many people, not just in salmon farming think marketing is just an up market way of describing the selling process. This is widely apparent in many companies, who clump sales and marketing activities together.
67. What is marketing?
Marketing is not about selling product, but about getting the right product, to the right market, at the right time and at the right price, and most importantly at a profit.
To do this most effectively, it is essential to have a full understanding of who the potential customers are, where they are, what they buy and so on. Without such knowledge, the farmers just produces and hope he has the right product that the market wants. Whilst some of this may be rather obvious, it is also not surprising that the day to day activities of just running a farm can divert attention away from these basic issues. This is compounded by the fact that most of the salmon industry is geographically placed far away from the markets and therefore the farmer is often divorced from his real customers, the end consumers.
This has been exhibited by two publicised examples. The first is that during the opening of a new feed mill, a leading industry figure commented on the difficulties of the market. He said that with such uncertainty in the market, he did not know whether he should be producing fish of 3 kg or 6 kg size.
However, if he did not know which size of fish he should be producing, how can he know who is customers are?, when they want the fish?, where they want them? and how much they are prepared to pay?
The second example is that of the promotion the Scottish Salmon Festival, which was deemed a failure by many retail fishmongers. This was because they were unable to obtain the sizes of fish required by their customers. This is simply a lack of market awareness.
Part of the problem is due to the preconceptions, which dominate the industry. This is manifested in the marketing activity by the selective way of generating market research using the outside market research companies. This maintains the distance between the consumer and the farmers. Whereas, what is really required is a hands on approach with direct observations of the marketplace, supported by wider information of market trends.
68. Which market trends are relevant?
There are differing opinions, as to which trends should be followed. After all, the European market is made up of a number of countries, each with very different habits to fish consumption. What applies in one country maybe totally irrelevant in another. However, with more international awareness, even those countries with the strongest independent traditions are showing, some change to the global markets. Certainly, in the wider food sector, there are few countries who have not been exposed to MacDonalds, Kentucky Fried Chicken or Pizza Hut.
More usually, it is the younger generations, which have forgone their traditions and adapted to the global market. The same will apply to all food consumption and we will start to see the further development of some of these trends throughout Europe, although some may take longer to develop than others.
69. So, what are some of these trends?
To consider these trends, it is necessary to look at the changes which have occurred in the marketplace. This differs from country to country and therefore the UK market alone, will be examined here.
Since the early 1960's, the number of retail grocery outlets has declined from about 150,000 to about 50,000. Surprisingly, the number of multiple retail stores has also declined. This may suggest that the type of store itself has not influenced this change, however this is not the case. It has been the rise of the giant multiple retailer, which has brought about these changes. The number of large retailers has also diminished, but those that remain, operate much larger stores. Therefore, the trend is towards larger stores, belonging to just a few main retailers. Some commentators see this as undesirable, but consumers simply vote with their feet as they see a much greater choice and quality, than can ever be offered by the small grocer. The result is that the top 20% of key retail outlets now account for about 90% of total UK retail turnover.
70. How has this affected fish purchases?
In terms of fresh fish purchases, the independent fishmonger, the traditional bastion of fish sales, have lost their market share to the multiples. Traditional fishmongers now account for just over 40% of fresh fish sales, but this figure will continue to decline as the number of fishmongers also continues to decline. Approximately 11% of retail fishmongers are closing every year.
However, these figures are misleading on their own, because they represent only fresh fish sales. The market for fish includes frozen primary and secondary processed products as well. The total market for frozen products is now about 65% of the market with the remainder consisting of fresh, chilled and smoked fish products.
The move towards frozen fish sales is not surprising as the younger generations especially, look for convenience and ease of cooking, together with the one stop shopping, which the large retailers offer.
71. Do these younger consumers, buy proportionally more fish?
The answer is no. The highest consumers of fresh fish are those over the age of 45. They account for nearly 35 of fish consumption, whilst those in the age group 16-27 only consume about 6% of total sales. This group, by comparison are the largest consumers of added value products such as fish fingers.
What is clear is that the older age groups, who were brought up when the only fish products available, were fresh fish, are more used to buying such products now. By comparison, the younger age groups prefer to buying secondary processed, added value products. As these groups age, they will undoubtedly continue to make similar purchases.
This trend can be seen from the increase in servings, for all age groups, of frozen and processed products from 55% to nearly 70% in just the short period from 1987 to 1994. During the same time, fresh fish consumption has declined from 45%, to just under 30% of total fish servings.
72. Does such consumption represent the total market for fish?
Whilst retail sales and home consumption dominate the market for fish with 53% of total sales, they do not represent all fish sales. The catering market accounts for the other 47%, which is divided between the catering sector at 32% and fish friers at 15%
The catering sector is important, especially as this is perceived to be for whole fresh fish, yet this is not the case. The catering market is increasingly supplied by food service companies, who provide pubs and restaurants with ready processed heat and serve dishes. A declining number of restaurants, still purchase fish as a basic raw material
73. So, what conclusions can salmon farmers draw from this change in consumer preference?
The main target market must be for secondary processed, added value products, which are most probably frozen. The bulk of this market is currently shaped blocks of fish, either breaded or battered, produced ready for the oven. Many farmers would suggest that salmon is not comparable with the commodity fish species used is such products. But this is simply because farmers have a preconceived idea of what salmon is or, is not.
There are many other potential products, which could be manufactured. The list is unlimited and simply restricted by the limitations of the imagination.
The key point about all such product development is that for each fish, which is turned in to a totally different product, it represents one less fish competing in the open market. Processing fish into different products reduces the competitive pressure on the traditional markets, reducing the likelihood of further collapses in price.
The best example of how this would benefit the industry, comes from the UK retail market. Whilst the Scottish industry readily complain that Norwegian imports are undermining the price of salmon in the European market, they do not raise even an eyebrow at the 28,000 tonnes of canned Pacific salmon, which is imported into the UK every year.
The Scottish industry fail to see this salmon, as a threat as they do from Norwegian salmon. This is because the product is canned and secondly, because it is produced from Pacific salmon.
The Scottish industry do not perceive canned salmon as a threat, because it does not compete against their fresh produce. However, equally, if some of the European salmon production was processed into other products, it would also lessen the competitive pressure on the fresh produce. In fact, if a large percentage of the salmon could be processed in this way, then the Scottish aspiration to keep fresh whole Scottish salmon, could be easily attained.
Equally, the Scottish industry do not see Pacific salmon as a threat to their own salmon production. This is because, they believe that Atlantic salmon from Scotland to be superior to anything else, especially to Pacific species. They therefore, do not perceive it to be a competitive product, especially when sold in cans.
However, Scottish salmon farmers should not be complacent. This is for two reasons. The first is that Norwegian salmon is starting to appear in British supermarkets, in canned forms, although the presentation is different to North American cans. Secondly, raw fillets of Pacific salmon are also available from the same stores. These, previously frozen, fillets are available in a variety of marinades.
Scottish salmon farmers should therefore, be concerned, since many consumers simply cannot differentiate between salmon from various sources. To them, salmon is just salmon. This is the image, on which farmers must now capitalise.
74. But, is some salmon not already available in such forms?
Experience from the wider agricultural sector has shown that once an industry moves towards volume production, farmers do not have to restrict themselves to the low margins available from selling the raw material. Instead, the farmer can increase the margin by adding value to the salmon before it is sold. This is now common practice within the intensive broiler industry for example, where whole new market opportunities have been created through added value processing.
It was therefore, not unexpected that some farmers would also consider added value processing as a way of increasing profitability. This has taken various forms but the two most common have been steaking and filleting and smoking.
Smoking is a logical route for adding value to salmon. Smoked salmon is considered an expensive delicacy. However, as more and more companies have turned to smoking, the increased availability of smoked salmon has devalued the price of this product.
With 20% of Scottish production destined for smoking, smoked salmon can now be bought extremely cheaply. There is a danger that this market could also collapse, unless the volume of smoked fish produced is reduced. This could be easily achieved, if more and more salmon is diverted into other markets.
75. So, what action should be taken?
The House of Commons Scottish Affairs Committee were clear in their recommendations that the industry should expand and diversify the markets and invest in innovative product development. Unfortunately, the industry rejected this suggestion.
One of the reasons why, is the confusion over the terminology of marketing itself. In discussions about the markets, some sections of the salmon industry, believe that the term markets refers just to different countries, ie a market for France, or a market for Japan.
However, this is a very simplistic view.
76. So, what does the term "markets" mean?
Markets can refer to any product grouping, irrespective of the country in, which the products are targeted. Therefore the market for fresh whole salmon is a different target market than that for steaks and fillets, which are different again, to that for canned salmon, and so on. Each market should be considered in its own right and not as part of a wider market for "salmon". This is exactly why the concept of Producer Organisations will simply not work. They are designed to consider the market for just whole, fresh salmon. However, as they form the basic raw material for all types of added value products, they cannot be evaluated in isolation.
77. Are salmon farmers able to access this market?
Salmon farmers have raised two key objections, in response to calls for a move to a market led strategy. The first is that they are only producers of raw material and lack the expertise or resources to access this market.
The second objection, is that most farms are not large enough to supply the requirements of the national and multinational retailers.
In addition, the Scottish Salmon Board will claim that several processors are already involved with such product development. This is certainly true, as the number of such products, now available in the UK, has risen from two to over 50 during the last three years. The problem for the industry, is that it is the processors, who obtain the benefits of the added margin, not the farmers.
78. So, does this exclude most salmon farmers from the new and expanding markets?
The markets have also undergone significant change for several years. The salmon industry has also dramatically evolved, however this is only the beginning of, what can be best described as, radical change.
In the early days, the salmon industry was perceived as being a supplement to the activities of fishermen. Farms were expected to be small one or two man enterprises. As the industry developed, the larger companies grew at a much faster rate, so the industry grew disproportionately. The large farms got larger and many of the small farms were absorbed into their structure. The remaining small farms have fought to remain competitive, but as the markets continue to change they will find it increasingly difficult to compete as separate ventures.
79. Does this mean that the future industry will be dominated by large farming groups?
Without any further change to the current industry structure, it is clear that with time, the largest farms will dominate salmon farming. These will swallow up the small farms in order to gain access to the sites. The increased tonnage will enable them the access to the largest markets, and it will also enable them to initiate product development.
80. How will the small farms be able to coexist with the industry giants?
Small farms will only be able to survive, in the face of the larger companies, if they adopt one of two strategies. The first is to develop their own niche market, i.e. local shops and restaurants, or even mail order, etc, of customers, who will buy due to the personal nature of the business.
The second strategy, and most viable is to co-operate together to form co-operative ventures, with a combined large volume of production. Thus, the small farmer can benefit from the economies of scale, such as bulk discounts on feed and also gain access to the large markets.
81. Have some farms, not already adopted this strategy?
Some farms, especially in Norway, have moved towards this position, but whilst they do obtain the benefits of bulk discounts etc, they tend to sell their production to a single company, who then primary processes and sells on the fish on their behalf. This is still a step away from a truly co-operative venture, in which the farmer is totally involved.
An example of this arrangement, can be found in Scotland although it is a co-operative of trout farmers. They have developed sufficiently that they have supplied at least one major retailer with secondary processed, added value products, under their own brand label.
82. Co-operation alone will not pay towards the high cost of added value processing?
The provision of a processing facility, especially of one of a sufficiently high standard to meet current health standards, can be extremely costly to establish. These costs may be well beyond the means of a large farming company, let alone those of a group of small farmers. Such costs are also of high risk, since the success of a new product is not guarantied, just because it seems to meet the needs of the market.
It is this high cost, which has deterred even the most progressive of large companies from pursuing this strategy. Yet, there is an alternative way of accessing this market and the financial rewards of extra margin. This can be achieved through contract manufacture.
83. How will contract manufacture, benefit the farming company?
Contract manufacture will enable the farmers to gain access to the consumer market, whilst retaining ownership of the product. The final margin may not be as great as could be obtained, however, there are no major over-heads other than the contract cost.
The contract manufacturer also benefits, since he will receive his payment, without the expense of the raw material cost, marketing costs and sales costs. These will be the responsibility of the farming company.
The product can be produced under a brand label or as the retailers private label. If the product, should prove to be a success, then there is no reason why at a later date, manufacture cannot be brought in-house. For a company or co-operative, contract manufacture enables access into a range of different product areas, expanding the potential for enhanced margins.
84. Is this the only option?
The choice is simple. The industry can continue to expand, and therefore the markets must also be expanded, in line with consumer demand. The model, despite the obvious differences in biology, is the intensive broiler industry.
Forty years ago, chicken was a special once a week treat. Production expanded to take advantage of this market and in doing so became extremely efficient. Inevitably, the market for whole birds became saturated and producers began to process the birds into portions. Every part of the bird was been offered for sale. Halves, quarters, breasts, breast fillets, wings, thighs, legs and even livers are all readily available.
As this market developed, portions were offered in different styles, such as Chinese, Tikka, etc
In parallel, development of products, such as Chicken Kiev, schnitzels and recipe dishes, has also progressed. The range of possibilities has yet to be fully exploited and so the list of added value products continues to grow, with the margin, benefiting the large integrated producers.
This is also the vision for the future of salmon farming.
The price of salmon must now remain low. With the volume of salmon now produced, it will be impossible to force up prices again. Therefore, without such added value development, farms will continue to operate on very low margins. The alternative is to continue to demand limitations on production so that the market is restricted. However, unless global agreement can be obtained, such controls can never become reality.
85. Are Producer Organisations a realistic option?
The answer is clearly no.
The Scottish industry has remained blinkered to alternative solutions for the last six years. It has pursued this strategy, without consideration of any other option despite the fact that their aspirations could be met in other ways.
Producer Organisations will be a bureaucratic nightmare, which are clearly unworkable. especially without global agreement and this is not forthcoming.
The only way forward is to address the needs of the market. Whilst, there are marketing initiatives underway, they fail to recognise the past industry changes. The modified industry, requires a new marketing strategy. The established marketing effort are no longer appropriate.
The European industry has the option to rise to the challenge of the unlimited opportunities, which now exist. The alternative is to condemn salmon farming to being a small, fringe industry, producing a limited volume of fish for a specialised, high value market.