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Salmon farmers seek strategy for taking profits to next level

Imports climb 290 million pounds in 30 years, but future growth hinges on adding value

Twenty years ago, consumers on the East Coast who wanted to eat salmon had to wait for Alaska’s wild summertime catches. Even then, kings and cohos were a rare find, and chums were the most prevalent salmon on the market.

Flash forward to today: Farmed Atlantic salmon is a commodity seafood product available year-round at virtually any grocery store for around $4 a pound. Most casual and upscale restaurants – even steakhouses – have at least one salmon entrée.

Within 30 years, the farmed-salmon industry has created a high-quality, low-priced product available 365 days a year.

"It has just about everything you want in a seafood product, without the fuss," says one Southwest grocer. "It allows the retailer to project out in a way that allows him to advertise."

In 1999, global production of farmed salmon reached 871,200 tons. Along with Norway, which in the 1970s became the first country to create a viable commercial salmon-farming industry, Chile, Canada, Scotland and the Faroe Islands rank as top salmon-producing countries.

Chile is the U.S. market’s top supplier. In 2000, imports from Chile made up about half the nearly 290 million pounds of Atlantic salmon (worth $741 million) imported into the United States.

Farmed product now sets the market for global salmon supply, says Dr. James Anderson, environment and natural resource economics professor at the University of Rhode Island and editor of Seafoodreport.com.

"The wild industry is now a follower," he says, "and it will never ever be anything but a follower of [the farmed-salmon] industry from now on. The industry grew from innovation and a lot of hard work, and it’s really an amazing story."

A salmon history primer

The story of modern salmon farming began in the late 1960s in Norway and Scotland and in Washington state’s Puget Sound. Though thousands of miles apart, the researchers had a common motivation – replacing product and jobs lost to wild stock depletion.

Norwegian hatcheries were built around 1850 to produce salmon fry for release into rivers. In the late 1960s, the Norwegians successfully farmed trout in sea pens. Salmon soon followed. In 1972, Norway produced 46 metric tons of farmed salmon.

In the early 1970s, in Puget Sound, National Marine Fisheries scientists working on a pilot farm to grow pan-sized coho and chinook had within two years produced more than 65 tons of farmed salmon for test markets. But the U.S. government pulled the plug on funding, maintaining that the salmon industry should foot the bill for research and development.

The Norwegian government took the opposite approach. It funded research and development but put controls in place to encourage individual, rather than corporate, farms.

That policy in part prompted Norwegian farmers and investors to expand production in other prime salmon-growing areas, like Canada and Chile. Some Norwegians took their investment dollars and research overseas.

By the mid-1980s, farmed Atlantic salmon was available in most major markets. But the price was high, reaching $10 a pound to consumers at retail and about $4 to $5 to first receivers.

The Canadian industry came online in the late 1970s, and the Chileans followed suit in the 1980s, enjoying advantages like cheaper labor and less stringent government control than in Norway.

But two events in the last 10 years – an anti-dumping tariff and Chile’s fillet introduction – allowed Chilean growers to leapfrog Norway and Canada for U.S. market share. In 1991, the United States levied an anti-dumping tariff averaging 26.5 percent on whole fish imported from Norway, in effect pushing Norway out of the market.

Canada and Chile were well poised to fill the void as the market grew. Today, the tariff is still in place, and only 6 percent of Atlantic salmon imports are from Norway.

The lost income forced some Norwegian companies to go out of business.

"It was a great psychological blow in 1991 when this happened, and most Norwegians just didn’t want to do business here for a long time," says Peter Gati, president of Storm Seafood and former U.S. representative on the Norwegian Seafood Export Council.

It would be eight to nine years before the Norwegians returned to the market en force with value-added products.

In the 1990s, farmed-salmon supplies grew at an average rate of 50,000 metric tons per year. Meanwhile, global prices dropped 30 to 80 percent.

Chilean producers cleverly figured out that shipping fillets instead of whole fish would cut shipping costs. Plus, most retail customers would rather work with a fillet than a whole fish.

"In a way, the Chileans opened the way for us to do that. In 1993, they started to create the market here for fresh fillets," says Gati.

The fillet market has grown 15 to 30 percent annually, he says. Fillets are now the leading product form, making up nearly 60 percent of all salmon imports.

Consolidation brings change

As the industry comes of age, it is being transformed by consolidation. In the last few years, multimillion-dollar mergers and acqui- sitions have become common.

Dutch feed manufacturer Nut- reco acquired Mares Australes in 1988 and Marine Harvest in 1999. Last year, when Nutreco acquired Hydro Seafood for $435 million, the deal joined the world’s two largest farmed salmon producers. The company now accounts for 20 percent of global production and has 300 farms in Norway, Scotland, Ireland, Chile and Canada.

Companies that own farms in both Northern and Southern hemispheres have a huge production advantage because they have regular supply with fairly regular volume, says Ingvald Loeyning, managing director of Marine Harvest’s salmon business group.

Fjord Seafood, the fourth-largest salmon-farming company, also controls production in the four most important aquaculture regions.

Its recent acquisitions include SalmoAmerica and Tecmar, both Chilean companies, and the Belgian company Pieters NV.

This spring, it closed on the acquisition of ContiSea, a U.S. holding company formed in 1999 via the alliance of Atlantic Salmon of Maine and Ducktrap River Fish Farm.

The 30 largest salmon-farming companies control about 60 percent of global production, according to IntraFish, a Norwegian publisher of seafood market analyses.

"I think it’s turning from being basically a local industry in Norway and Chile and here in North America, into being a global industry with major, worldwide players," says Tore Arildsen of the Norwegian Seafood Export Council. "I still think there’s some restructuring to go, but I don’t think it will be as quick and dramatic as in the last year."

The biggest factor driving consolidation is efficiency. Economies of scale lower the cost of production. It’s a natural strategy for an industry that since its inception has focused on growing a better fish, both faster and cheaper.

Such pressure has resulted in developments in feed nutrition, genetic selection, improved animal-husbandry practices and vaccines that cut use of antibiotics to a minimum.

Producers also need economies of scale to protect themselves in a capital-intensive business.

"At the end of the day, no matter how much science and technology we apply to this, we’re still farmers," says Tom Royal, executive VP of Fjord Seafood Americas.

And as a result of efficiencies gained through science, animal husbandry and consolidation, the price of farmed salmon has steadily dropped, reaching an all-time low of less than $2 per pound so far this year. There is no drop in supply on the horizon. In fact, Marine Harvest says it will produce at least 162,000 tons this year. IntraFish predicts a 40 percent production increase for the industry overall.

Scaling back production in order to raise prices is impossible. There is a three- to four-year lag between hatchery stage and harvest time. While growout periods are getting shorter, there is still an 18-month to two-and-a-half-year span between stocking smolts and harvesting.

Adding value is next

While the eco-political landscape in the United States means a bleak growth outlook for the domestic industry, that’s not the case elsewhere. Norway promotes controlled growth through a feed-quota system, and there appears to be no ceiling to growth in Chile.

So the industry’s next step to improving profits is to differentiate salmon products somehow, whether by developing further-processed products, branding or aggressive marketing. Lower consumer and wholesale prices, along with availability, quality and simple value-added products like fillets and boneless portions have so far driven demand.

"To have global production increase as much as it has and not have a complete crash of market prices, that is extraordinary to me," says Royal. "But having said that, we’re now getting up to production levels where we have to take [marketing] seriously."

Until just a few years ago, most product was shipped into the United States head-on and dressed. A pinbone-out fillet was considered a value-adding breakthrough.

Some companies are just beginning to dabble in the market for ready-to-heat salmon meals.

Starfish is launching beer-battered Atlantic salmon ready to bake or deep fry. This month, Atlantic Salmon of Maine is introducing filleted portions marinated in three flavors and encased in modified-atmosphere packaging under the Ducktrap River brand.

Marine Harvest has had a marinated product on the European market for a year or two, says Loeyning. It has done well, especially in France and in the retail sector. The company is developing new flavors for the U.S. market and will be selling the product either as private label or under the Marine Harvest brand.

"We need to produce meals, rather than fish," says Marine Harvest’s Loeyning. "We really don’t want to sell a fish; then you are production-oriented. If you sell a meal, you’re market-oriented. In the end, that’s what the consumer wants – a meal."

Branding is another route. Consolidation is bringing the farmed salmon industry more inline with the broader food industry, says Knut Nordness of the Alliance Group, a seafood consulting company in Seattle.

"As the industry consolidates and gets more involved and integrated into the food industry, there will be more brands applied."

Even though farmed salmon has seen tremendous growth in the U.S. market, industry leaders say there is still growth to come, and value-added products are key

Odd A. Rygg, president of Pan Fish sales and marketing in North America, says there is about 93 percent salmon saturation in retail stores with fresh fish counters. Growth will come from stores without fresh fish counters in the form of portioned tray-pack and frozen portioned product.

In foodservice, Rygg predicts the growth potential lies in the casual-dining sector and even the quick-serve-chain sector.

The progress the farmed salmon industry has made in a relatively short period of time and the projected future growth beg the question: Can farmed salmon’s success story be replicated with other species, leading to better control over the global seafood supply?

Loeyning of Marine Harvest, which is selling halibut raised on Scottish farms, says, "I think cod could be a product with similar size possibilities, and we are looking into that." He adds that there are other fish species that have potential for farming but notes, "We’re not able to do all those species at the same time."

You can e-mail Lisa Duchene at lduchene@divcom.com

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