Farmed salmon

Species Focus: August 2000

Farmed salmon

As world harvests approach 1 million tons, the industry consolidates to keep up with spiraling demand

By Peter Redmayne

In the retail business, "location, location, location" is the industry mantra. In the farmed-salmon business, the mantra these days is "consolidation, consolidation, consolidation."

And that means the farmed-salmon business is getting more and more like, well, the chicken business.

"If you’re not one of the top five companies in this business, you’re not going to be successful," says John Taylor, the Toronto-based president of Stolt Sea Farm’s North American operations. "You can’t stand where you are without sliding backwards.

"Look at what happened in the poultry business. It’s the same thing. We’ll continue to expand aggressively."

The biggest deal to date is the proposed $450-million acquisition of Norway’s Hydro Seafood, the largest salmon-farming company in the world, by Nutreco Holding, a vertically integrated Dutch agribusiness giant.

Nutreco, which has quickly expanded downstream from its feed business, bought Marine Harvest, the second-largest salmon farming company in the world, last summer.

After digesting Hydro and Marine Harvest, Nutreco will account for an estimated 20 percent of the world’s farmed-salmon production, which is expected to surpass 1 million metric tons a year in the next two years. With farms in Canada, Norway, Chile, Scotland and Ireland, the company is strategically positioned to service the world’s largest salmon markets.

Two other big names in the farmed-salmon business have also been busy, although they haven’t pulled off blockbuster deals like Nutreco. Pan Fish ASA and Stolt Sea Farm A/S, two Norwegian companies who were also in the running to acquire Hydro, have been actively snapping up salmon farms.

Pan Fish, for example, now owns all the salmon farms in Washington state and will harvest an estimated 20,000 tons of Atlantic salmon this year from its sites in Washington and British Columbia.

All together, Pan Fish will produce more than 100,000 tons from its farms on the west coast of North America, in Norway, Scotland and the Faeroe Islands, says its president, Arne Nore.

Stolt Sea Farm, which harvested about 60,000 tons of farmed salmon in 1999, is still digesting International Aqua Foods, a company with sites in British Columbia, Maine and Chile, which it acquired last year for $11 million and the assumption of $9 million in debt.

"They lacked the capital to expand their operations to their full potential," says Taylor. "We have the capital to do that, so it was a good fit."

Stolt Sea Farm, which is a unit of the Norwegian shipping company Stolt Nielsen S.A., also has salmon farms in Norway and Scotland. In North America, Stolt has farms in New Brunswick, Maine and British Columbia and a value-added salmon-processing plant in Los Angeles.

Although its production lags behind that of Stolt and Pan Fish, Heritage Salmon is another salmon-farming company on the move. A unit of George Weston Ltd., a giant Canadian food company with annual sales of almost $15 billion (U.S.), Heritage is expanding production at its farms in Maine, New Brunswick and British Columbia, as well as in Chile.

With all the consolidation going on, it is now estimated that just four companies — Stolt, Marine Harvest, Pan Fish and Heritage — produce more than half of the farmed salmon sold annually in North America.

Fueling the mergers

Behind the salmon-farming industry’s rapid urge to merge are several factors. First, there’s no shortage of money. Salmon farming is suddenly a very profitable business. And the bigger you get, the more profitable you become.

Over the past few years, the big salmon farms have driven production costs below $1 a pound through the use of high-energy feeds, better husbandry and growing economies of scale.

At the same time, prices have been steadily climbing, as consumers in big markets like the United States and France have a seemingly insatiable appetite for farmed salmon.

"We’re all producing more fish, but demand is exceeding supply," says Ken Taylor, vice president of Pan Fish Sales USA. Taylor estimates his company is getting an average price of about $2.50 a pound this summer for big, whole, farmed Atlantics; that’s 30 cents a pound more than last year.

And that’s producing some pretty fat margins — at least by salmon-farming standards. One study of the Norwegian farmed-salmon industry, which produces more than half of the world’s farmed salmon, reported that the industry’s net margin increased 32 percent from 1998 to 1999, to an average of almost 20 cents a pound.

And this year is expected to be substantially better, as prices have continued to rise. The companies that are producing the largest volume are racking up some pretty nice profits — much to the delight of investors.

Shares of Pan Fish, for example, which is traded on the Oslo stock exchange, have soared almost 500 percent over the past 12 months.

"It’s a good business," says Jim Craig, who runs Marine Harvest’s North American sales operation out of an office in Fort Lauderdale, Fla. "Companies are making money. I don’t hear anybody complaining."

"It’s a very healthy industry," confirms Anne McMullin, executive director of the British Columbia Salmon Farmers’ Association. "We had our best year ever last year. Our production grew 19 percent to 48,000 metric tons."

Another factor behind the rapid consolidation in the farmed-salmon business is the consolidation among food retailers, the fastest-growing market for farmed salmon.

"The big chains want big volumes of fresh farmed-salmon fillets 52 weeks a year, and they want contract pricing. You have to be a big producer to do that," says Craig.

The retailers’ growth in sales of pinbone-out farmed fillets has been nothing short of phenomenal. Costco, for example, now sells an estimated 10 million pounds of farmed fillets a year at its club stores in North America.

Although Costco recently raised its fillet price from $4.79 a pound to $4.99, the increase is not likely to slow down its sales growth.

"[Farmed salmon is what’s] driving the seafood counters," adds Craig. "There’s not a retailer that doesn’t sell farmed salmon." He estimates that 22 percent of all retail-seafood-counter dollars now come from farmed salmon.

At the same time, foodservice demand is also increasing; but compared to retail, growing the foodservice side is a bit of a struggle.

Some salmon-farming companies, like Stolt, have made large investments in value-added product lines that include everything from seasoned portions to marinated satays and shish kebabs, but developing markets for these items hasn’t been easy.

"It’s taken awhile. It’s been a longer battle than we expected," says Stolt’s John Taylor. Still, he estimates about 40 percent of his company’s North American production goes into fillets and value-added products, compared to 20 percent a few years ago.

It’s a different story on the other side of the Atlantic, where Norwegian companies like Pan Fish have closed their value-added plants.

"The cost of raw material is just too high," says Ken Taylor. "Everything’s being sold whole to Europe."

As a result, the sudden surge in exports of Norwegian fillets to the United States last year has slowed to a trickle this year.

Continued tight market

Although farmers are trying to increase their production to take advantage of the attractive margins, buyers can expect to see farmed salmon remain on the tight side for the near future. Norway, for example, has fewer fish in the water this year than last year, as farmers have harvested early to take advantage of the high prices.

Down the road, look for more production, especially from Chile and British Columbia, where a moratorium on new salmon-farming sites is being slowly lifted.

"This industry is going to grow," says McMullin. "We want to see a 5 to 10 percent increase every year. That’s sustainable."

But whether that’s enough fish to cool off the spiraling demand remains to be seen. Between 1998 and 1999, the U.S. farmed-salmon market grew of between 20 and 30 percent, estimates Marine Harvest’s Craig.

And that growth has continued so far this year, which has caused spot shortages and the highest farmed-salmon prices seen in years.

Big demand. Big production. Big companies. The farmed-salmon business is definitely taking on more of a chicken flavor these days.