Aquaculture sector - wider economic impacts: estimates

9. Consultations

This section sets out the key themes and findings from consultations with businesses and industry bodies across Scottish Aquaculture.

9.1 Consultees

The initial consultees were proposed during the Project Inception Meeting. In this meeting it was agreed that the consultation programme should cover public sector agencies, industry bodies and the industry representatives selected from the case studies. The agreed organisations to consult with were:

• Scottish Salmon Producers Organisation;
• Shellfish Growers Association;
• British Trout;
• Scottish Government Input Output Team;
• Scottish Aquaculture Innovation Centre;
• Highlands and Islands Enterprise;
• Marine Scotland Science;
• Scotland Food and Drink;
• Scottish Seafood; and
• Seafish Scotland.

BiGGAR Economics worked with the Steering Group to identify the most appropriate individuals within these organisations to contact regarding this study. Initial contact was made with each individual via email and then followed up with by a telephone call in order to arrange a time to discuss the project.

Of the agreed consultees, four have been removed from the list:

• Marine Scotland Science has been removed from the list as the initial discussions with the key contact concluded that industry members would be in a better position to give an industry perspective;
• Scottish Aquaculture Innovation Centre has been removed from the list as after initial discussions with the key contact, they left the employment of the SAIC prior to an arranged meeting and their expertise has not been replaced in time;
• Scotland Food and Drink has been removed from the list as no key contact has been provided and team discussions concluded that industry members would be in a better position to give an industry perspective;
• Seafish Scotland have been removed from the list because no key contact has been provided and analysis of the differences in supply chain and employment profiles of Seafish companies, as compared to aquaculture companies, concluded that the differences between the sectors are significant.

The majority of consultees highlighted that the best data would be held by the companies directly involved in the aquaculture sector. Therefore, the following companies were added to the consultation programme:

• Loch Duart; and
• MOWI Scotland.

In addition, BiGGAR Economics consulted with Professor Hervey Gibson, who explored this topic independently in 2019.

9.2 Thematic Analysis

This section sets out the key themes that have emerged during the consultation programme and in the answers to the survey’s open-ended questions. Where information was not publicly available and considered commercially sensitive, reference to individual businesses was not made.

Consultations have provided qualitative evidence over:

• production cycles, challenges and market trends;
• vertical integration and consolidation;
• supply chain;
• workforce; and
• regulatory barriers.

9.2.1 Production Cycles, Challenges and Market Trends

Within the global salmon market, Scottish Atlantic salmon is considered a premium product. This is because of:

• the specific environmental conditions existing in Scotland (e.g. water temperature);
• higher welfare standards;
• the product’s relative scarcity (around 8% of global production); and
• Scottish salmon being a niche product with lower stocking.

These characteristics have contributed to the price of salmon more than doubling between 2012 and 2019, when it has increased from around £2.50/kg to over £6.00/kg. However, over the same period production costs doubled, driven mainly by increases in health care costs.

Production of Atlantic salmon is normally a two to three-year process and volumes tend to be relatively stable. However, production may be affected by risks to fish health. Potential problems are usually identified during the summer since the period between August and October, when the seas are warmer, is when fish is most susceptible to disease. For precautionary reasons, salmon may then be harvested early, when it weights between 3/4kg rather than 6kg. Fluctuations in the production process of this kind happen rather frequently and occurred both in 2017 and 2019.

Fluctuations affect the annual impact of the sector as a year with a larger harvesting will be followed the year after by lower production due to early harvesting. While not affecting production, if considered over a two-year period, these fluctuations influence the economic impact from employment, as over-time is paid when over-harvesting takes place. This is not offset in periods when production is lower, due to the scarcity of the skills needed in this sector. Supply spending is mostly unaffected by these fluctuations since most costs are fixed, though early harvesting translates into lower feed costs.

Changes in the economic impact associated with the sector will take place only with an increase in farm sites, through which the sector’s impact would be scaled. Fluctuations due to changes in the product’s value and the disease environment are unlikely to affect the industry’s long-term impact. Trout production is likely to expand in the future as both Dawnfresh and Kames have ongoing planning applications.

The sector is technologically advanced and has seen technological innovations including in recent decades the move from big to small pens, automatic feeding and mechanical lice control. Most producers see technological improvements as the main future driver of productivity in the sector.

Some producers have reported Brexit as a cause of concern. This is mostly due to the trade framework under which they will operate.

9.2.2 Vertical Integration and Consolidation

The consultations suggested the emergence of two trends that are shaping the market structure of the aquaculture sector in Scotland:

• vertical integration; and
• consolidation/amalgamation.

Vertical integration refers to the process through which a business produces goods or services that were previously bought in from suppliers. Activities that already tend to be integrated within salmon production include hatcheries and processing. Larger companies may also have their own veterinary and transport departments. In general, the extent of vertical integration as well as the type of activities integrated seems to depend on a company’s size.

Both MOWI and Cooke Aquaculture have recently undergone vertical integration, while other producers are considering doing so. MOWI has established a feed plant on the Isle of Skye, that, once fully operational, will provide almost all the feed necessary for its farms. Cooke Aquaculture has recently created the Northeast Nutrition Limited, following its acquisition of the former Skretting fish feed mill in Invergordon. The integration of fish feed in their activities has significant implications for these companies since feed is their main supply chain cost.

Vertical integration and consolidation will change the market structure of the aquaculture sector and have repercussions on the supply chain

Across the aquaculture sector, there has been a reduction in the number of sites or companies. The number of companies in the shellfish sector has decreased over time due to amalgamation, whereas there has been a reduction in the number of sites producing Atlantic salmon. The reduction in the number of businesses may represent the emergence of economies of scale, with larger businesses having cost advantages due to their size. However, there remains no large producer in the shellfish sector and the Crown Estate is now seeking to address this lack of large-scale sites.

While changing where the economic impact takes place and the companies benefitting from it, vertical integration is unlikely to affect the overall economic impact of the aquaculture industry in Scotland. However, this may disrupt existing companies that are part of the supply chain. Consolidation, where leading to economies of scale, has on the contrary, the potential to increase the sector’s future economic impact.

9.2.3 Supply Chain Trends

Spending in the supply chain makes an important contribution to the industry’s impact and is seen by Highlands and Islands Enterprise (HIE) as a major opportunity for Scotland.

Producers in the aquaculture industry incur two types of costs:

• capital spending; and
• operational spending.

Operational spending includes those annual costs that are linked to a single production cycle, whereas capital spending encompasses spending on machinery, boats, maintenance and repairs.

‘Spending in the aquaculture sector’s supply chain is a major opportunity for Scotland’.

The relative importance of the contribution from these types of spending varies according to each subsector within Scottish aquaculture and is broadly proportionate to the subsectors’ size. Supply chain spending has the largest impact for Atlantic salmon production and producers are well aware of the impact of this spending and where possible tend to source from locally.

The main difference emerged across the industry concerns the origin of operational and capital spending. The former has a relatively large share of Scottish content, whereas the latter is mostly sourced from outside the UK.

Feed is the largest variable cost across the production of finfish species, though it is not incurred by shellfish producers. Feed for Atlantic salmon is mostly sourced from Scotland, when this is not already vertically integrated. Trout feed, however, is mostly supplied from abroad and is mostly produced in Europe.

Other companies that provide services for salmon producers include:

• Gael Force, the production of which includes pens, mooring systems, feeding barges and feeding systems;
• Inverlussa which provides services including vessel hire, installations and treatments; and
• the Fish Vet Group, which provides the aquaculture sector with veterinary products.

Spending on capital goods includes the purchase of machinery, boats, cages and any associated maintenance and repairs works. Most of these products and services are provided by businesses outside the UK. These goods tend to come from Iceland, Denmark and Scandinavia, with some of the producers having operations in the UK. However, the engineering skills required to install and use the equipment are then available in the UK and supplied by local businesses.

The shellfish sector is associated with a minimal supply chain impact. Capital, when purchased, comes from outside the UK, though it is common practice to lease vessels from larger producers.

The findings over the sources of supply spending from the sector, alongside the data received by survey respondents, formed the basis of the modelling of supply spending impacts.

9.2.4 Workforce and Local Impacts

The extensive use of technology deployed within the aquaculture sector has meant that the sector has a highly skilled workforce. This is unlikely to change in the future as it is expected that in this sector technological progress will be accompanied by an increase in high skilled jobs.

The high level of skills and the difficulty of replacing them has also an impact on firms’ decisions during periods when production is low as a result of the fluctuations in production described above. During these periods, businesses retain their workforce and focus on skills development, training and maintenance at the fish farms.

Data for the companies that filled in the survey provide a snapshot on the composition of the workforce in the Atlantic salmon sector. Over 93% of the employment in the companies surveyed was permanent. Seasonal workers, employed through agencies, are usually employed during peak times and for the processing of fish products.

Technological progress has resulted in an increase in the number of in highly skilled jobs

Between 39% and 47% of the workforce are less than 35 years old. The Atlantic salmon sector is a source of well-paid employment relative to employers in the local areas where it operates and there is potential for career progression. For instance, an 18 years-old can expect a starting salary of around £20,000 as an operative and, through training and experience, can become a farm manager and earn around £40,000.

The sector is male-dominated with survey respondents reporting that 82% or more of their workforce is male. Up to 10% of the workforce is from the European Economic Area (EEA).

The shellfish sector is likely to have a workforce featuring a different age breakdown. In this part of the sector, activity takes the form of a hobby and as a result there is a higher concentration of retirees and 60+.

The importance of motivated staff and communities for staff to live in has also been highlighted as an important factor and a potential future challenge. This is because of the rural nature of the places where businesses in the sector operate. Companies have an overall interest in thriving local communities and make a contribution to local development, as evidenced by Loch Duart’s community benefit scheme, the Salmon Pool Fund.

9.2.5 Environmental Impacts

Aquaculture, both finfish and shellfish, is a relatively low carbon intensive way of producing animal protein. As a result, it is likely to have an important role in future global food chains and to witness an increase in future demand from more environmentally-conscious consumers.

The production process and its reliance on the marine environment is particularly susceptible to changes in environmental conditions. Warmer seas and their associated environmental impacts are widely seen as a potential medium-term threat. Partly as a result of this, the sector has been careful to limit and mitigate its environmental impacts.

This has often been achieved by adopting technological solutions to environmental problems. The deployment of technology to avoid or mitigate the environmental impacts associated with feed and fish excrement leaving salmon cages provides a recent example of this trend. Higher animal welfare has, in turn, translated in a premium on the value of Scottish salmon.

Shellfish farming has particularly beneficial environmental impacts and is seen as a net carbon absorber. For instance, it was suggested that a hectare of shellfish farming can capture the equivalent of the annual CO₂ emissions of a 4x4 vehicle. In addition, shellfish production does not require any medicines or feed, which further limits shellfish environmental impact. Trout farming has a relatively lower environmental impact than salmon production as trout are better convertors of food and sea lice is less of a problem for this animal produce.

9.2.6 Regulatory Barriers

Regulatory barriers are widely seen as a constraint towards the expansion of the aquaculture sector in Scotland. The main constraints identified were:

• rules on state aid that limit financial support from public agencies; and
• planning.

Because of state aid rules, HIE and other public bodies can only provide financial support to small and medium enterprises (SMEs). For this reason, only two of the seven salmon producers can receive financial support from HIE. Under state aid rules, large companies can receive only up to €200,000 over three years. However, fish production has additional restrictions that lower the limit of financial support allowed to between €20,000 and €30,000.

Restrictions on the financial support that public sector bodies can provide to the sector have influenced their interaction with larger producers. As a result, engagement with large businesses tends to focus on staff training and development. For instance, HIE supported the provision of the skills required for the MOWI feed mill in Skye.

Planning constraints the expansion of finfish as well as shellfish. For instance, most of the best sites for trout farming are already exploited and there are difficulties in expanding freshwater sites. In this context, the sector would advocate a one stop shop approach to planning. The cost of licences for shellfish sites – up to £20,000 – and the associated requirements for a sanitary survey make expansion and entry into the shellfish market complicated.

9.3 Summary of Consultations

The consultations exercise has contributed to our understanding of the industry and of its impacts on the Scottish economy. The following conclusions were relevant to the modelling exercise:

• the sector employs a highly skilled workforce and pays relatively high wages in comparison to other employers in rural Scotland (induced impacts);
• operational supply chain expenditure tends to take place in Scotland, whereas capital spending is more likely to occur abroad;
• the sector, due to animal health challenges may experience fluctuations in production as fish may be taken to the market earlier; and
• the sector is experiencing vertical integration and amalgamation. Vertical integration is not going to change the overall impact of the sector. Amalgamation may lead to higher impacts were scale be reached.

Other findings include:

• regulatory barriers are often seen as a constraint to the development of the sector;
• the sector provides high-quality jobs across rural economies;
• changes to the environment are seen as potential medium-term threat to the sector’s viability; and
• compared to other producers of animal protein the sector has a relatively lower environmental impact.