Value added will play important role in future, report says

A number of challenges must be overcome, but the long-term future for aquaculture, and salmon farming in particular, is positive, a report published today by Marine Harvest states.

In his introduction to the company’s annual report, Leif Frode Onarheim, who until February of this year was acting CEO, said the rising demand for seafood, coupled with a preference for convenience, indicates that value adding activities have an important role to play in future developments.

Prices for salmon in 2007 did not match the strong performance of 2006. However, the analysis of price development is encouraging going forward as prices in 2007 were similar to those in 2005 yet the supply of farmed Atlantic salmon to the global market was 33 percent higher. More people are eating salmon and per capita consumption is increasing.

“We expect demand will continue to grow,” he said. “In Europe and North America the rate of growth has become modest in comparison with some earlier years. Even so, a growth rate of 9 percent, as seen for example in Europe in 2007, would be welcomed by many market sectors. For salmon farming, though, the new engine for growth is found in the emerging economies.”

Countries such as Brazil, Russia, India and China have several factors in common. They have very large populations, with an expanding middle class that have increasing disposable incomes. Economists observe that as income grows there is a shift in diet from carbohydrate to protein, and fish is regarded to be an important source of healthy protein.

The market for Atlantic salmon in Brazil grew by 32 percent in 2007, the Russian by 38 percent while the neighbouring country, Ukraine, saw a 45 percent growth. These trends will continue – in Eastern Europe, in South America and in much of Asia, the report states. Due to the large numbers of people living in these countries the growth of these markets for Atlantic salmon could more than compensate for any slow-down in growth in Europe and North America.

The rising cost of food was also highlighted. In the mid-20th century, the average European household spent around 35 per cent of income on food. Government policies and increasing efficiency meant the price of food did not increase as fast as incomes. In recent years, the average household has been spending around 10 percent of income on food. Now that is likely to change.

“Competition for agricultural raw materials is increasing because of growing demand from these growing populations and, importantly, we see a surge in demand for many of the same products for the production of biofuels. The price of food products has increased and food will probably take a larger proportion of the household budget, reversing a trend that dates back some 50 years. While this may reduce the total volume of food purchased per household, we do not believe it will have more than a minor affect on the increase in consumption of fish.”

Increases in raw material prices mean increases in feed prices and margins will become tighter.

The report also highlighted the challenging conditions in the Chilean salmon farming sector.

“In 2006 the industry lost control over sea lice infestations, resulting in additional decline in biological performance, and the spreading of the ISA virus hit the industry with full strength in 2007," Mr Onarheim said.

“The outbreaks in Chile should be a reminder to the whole industry that even though demand may be rising, it is not necessarily good practice to increase production intensity too far.”

Consolidation in the salmon aquaculture industry is important to maintain a better balance between increases in production and increases in demand, he continued. The company's current priority, though, is to ensure that it optimises the structure of its upstream activities and follows its strategic intentions downstream.

“We will develop our positions further down the value chain to take more of our farmed fish and fish purchased through to end products and gain a greater share of the final price. The fish processing industry, in Europe especially, is highly fragmented and there are real opportunities to build positions. Currently the sector is characterised by a large number of small players that cannot match the negotiating power of large retailers.

“The progress in our VAP Europe business is a good example of the potential in this part of the value chain. Through restructuring of our operations the return doubled in 2007 compared to 2006. Our strategy is to take part in the further consolidation of the value added industry.

"Marine Harvest can build on its global production base and its established value adding activities to take the leading position in the seafood industry,” Mr Onarheim concluded.