Big fish, little fish
Consolidation in the salmon sector is based on hard economic realities, argues Dr Martin Jaffa.
The salmon sector in Norway appears to be embarking on a journey that Scottish producers took many years ago – the journey of evolving from being an industry of many producers to just a handful.
I have heard many explanations of what happened, including claims that the Scottish industry was acquired by Norwegian owners to avoid the supposed constraints of Norwegian regulation. In fact, what happened to the industry was entirely predictable.
At the end of the 1980s, Highlands & Islands Enterprise set out a view of how they perceived a future Scottish aquaculture sector might look.
They believed that the sector would consist of producers of a wide range of different fish and shellfish species. However, this model never materialised, and instead it was the salmon industry that dominated the sector for many years to come. Why salmon led the field was simply down to its similarity to the poultry sector.
Chicken used to be expensive and a real treat. In post-war Britain, investment was made in food production and consequently chicken became much more widely available to consumers.
The problem for producers was that there was only a small part of the market prepared to pay a high price for this “special treat”. If the market was to expand then the price had to reflect the higher demand.
I always use the analogy of Rolls Royce cars and the question that if they were produced in the same numbers as the Ford Fiesta, would consumers still be prepared to pay £330,000? The answer is no – Ford Fiestas used to sell in the large volumes they did because they were priced at £19,000.
Salmon in market
This is what happened to chicken. The producers were growing more and more chickens and such large scale production meant that the costs decreased, along with the profit margins. The larger farms continued to be profitable, however, because whilst the margin on each bird was low, they were producing many more chickens. BBC’s Countryfile has just discussed this issue, pointing out that 80% of UK pig production is in the hands of 30 businesses, whilst 75% of UK chicken production is accounted for by just three companies.
The same process applies to salmon farming. Overnight, in the late 1980s, the salmon industry evolved from a low volume industry to one of high volumes. This change also meant that high margins became much lower. The industry faced a choice: cut back production and recreate salmon as a luxury treat, or expand production, making salmon an everyday food choice. We know which route the industry chose.
The problem for farmers was that the loss of margin needed to be addressed, and this was best achieved by cutting costs. Feed was one of the highest costs for the farmer, and to get a more favourable price it needed to be bought in larger quantities, to benefit from economies of scale. Bigger businesses could cut costs more easily than smaller ones. Even the smallest of businesses can compete, however, if they can become highly specialised and find a way charge a premium price for their product.
This is what happened in Scotland in the late 1980s and early 1990s. The 180 or so farms that were pioneers in the early days of the sector realised that the days of charging high prices for their fish were numbered, and that competing in future would be extremely challenging.
Whilst some promote the narrative that foreign owners came looking for farms to buy, the reality was that it was Scottish owners who were keen to sell. Over the subsequent years, the ownership of the Scottish industry changed, with fewer but much larger businesses. Today there are just six finfish farming companies operating in Scotland and whilst the critics complain that most owners come from overseas, the reality was that the industry was never really all in Scottish ownership. The first pioneers were Anglo-Dutch.
The pattern of consolidation seen in the chicken sector did not just focus on production. There was also a move towards processing the finished product for the retail sector. The salmon industry has taken a long time to follow this example but companies like Mowi now produce both branded and own label consumer products.
The question now is: why is such consolidation now on the agenda in Norway? The answer is that back in 1972, Parliament proposed that it was undesirable to have large facilities that affect the character of the sector. Salmon farming was seen as an extension of fishing and agriculture and initially ownership was restricted to a single licence. Today, there are almost 100 farming companies in Norway of which 17 account for 80% of the volume.
Can this structure still survive the pressure to change? Some of the smaller companies cooperate to obtain the economies of scale but these owners face competition, not only from other Norwegian producers but also in an international marketplace.
According to Dag Sletmo of DNB Seafood, it is those farmers that are stuck in the middle between the smallest and largest operators who are struggling with lower margins and profits. Thus, the much slower pace of change experienced in Norway may speed up so that Norwegian production looks more like that of Scotland – or Chile, where just 11 companies account for 80% of production.
A consolidated industry means that companies are better served to maintain much tighter control over their costs and thus ensure that they can supply a wide range of diversified products across the retail sector every day of the year. Salmon is such a versatile protein that the opportunities are endless, but these could never be met if the industry structure in Scotland had remained as 180 separate small businesses.
