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Scottish Economic Report: March 2004
Scottish Salmon Farming
Bob Henderson & Colin MacBean
Environment & Rural Affairs Department
Scottish Executive
Summary
The salmon farming industry in Scotland has experienced a rapid increase in output since the late 1980s. This, in turn, has stimulated the growth of the salmon processing sector and the combined employment, including multiplier effects, is estimated to have been 8,600 full-time equivalent jobs in 2001-02. These are based on the latest available survey figures and compare with the estimate of 6,400 jobs in 1996, which is when the last detailed assessment was undertaken. A number of salmon growers have recently announced plans for possible redundancies amongst their workforce as a result of historically low prices but it is too early to estimate the impact of these on overall employment levels. Growth has been driven by the dramatic increases in productivity, which have been passed onto consumers through lower prices which, in turn, have stimulated demand. The productivity gains reflect innovations in production technology and biology as well as the increasing importance of economies of scale.
Introduction
In March 2003, the Scottish Executive launched the Strategic Framework for Scottish Aquaculture. 1 This provides a long-term balanced framework which will allow sustainable development of the industry through a targeted series of economic and environmental actions. According to this document "aquaculture should be enabled to make a positive contribution to the Scottish economy through being internationally competitive in the marketplace and economically viable at national level."
The purpose of this paper is to consider how the contribution made by the production of farmed salmon has developed over the past decade or more, based on figures published in the Annual Production Survey of Scottish Fish Farms, produced by the Fisheries Research Survey (FRS) for SEERAD 2
Output Growth
Chart 4.2.1 shows the growth in output levels from 1987 to 2002. Over the period as a whole, growth averaged 21 per cent per annum but the general trend has been for the rate to slow over time. Between 1987 and 1994 it averaged 33 per cent pa, reducing to 15 per cent pa between 1995 and 1999 and again to 5 per cent pa between 2000 and 2002. Such trends are typical of a new industry that expands from a small base and then moves into a more mature stage of development. The reduction in 1993 reflected losses from disease but the following year output bounced back onto the longer-term growth path.
Shetland is the most important salmon growing region in Scotland and has been the largest producer since 1996 (Chart 4.2.2). It currently accounts for 34 per cent of Scottish output followed by the NW Highlands with 28 per cent. By contrast Orkney only produces 5 per cent of the output, with between 15 and 20 per cent of output each coming from the South West region (basically Argyll & the Inner Hebrides apart from Skye) and the Western Isles.
Employment
In 2002 the production of smolts and salmon provided 1,711 jobs, of which 18 per cent were part-time. Smolt production accounted for 24 per cent of the overall employment. The employment has remained remarkably stable and has been within 10 per cent of the 2002 level throughout the whole period between 1988 and 2002 (Chart 4.2.3).
The fact that all these jobs were located in the Highlands & Islands, with the exception of 17 jobs in smolt production, increases their relative importance because the sites are concentrated around the coasts of the more remote parts of the region such as the Northern & Western Isles, Inner Hebrides and the north and west mainland where alternative job opportunities tend to be limited. Nearly 4 out of 10 jobs are located in NW Scotland , with around 20 per cent in each of Shetland, West Highlands and the Western Isles (Chart 4.2.4). Orkney has about 6 per cent of jobs.
The difference in growth trends between the strong rise in output (Chart 4.2.1) and static levels of employment (Chart 4.2.3) is very marked and reflects the dramatic increases in labour productivity experienced by the industry. Such increases have delivered economic benefits to society. The increase in productivity has reduced the costs of production and the benefits from this have been passed to consumers in the form of lower prices. As prices have fallen, so demand has been stimulated and consumption has grown. Rising demand has encouraged further investment and additional output whilst allowing employment to be maintained. In the absence of output growth the increase in productivity would have led to a reduction in employment.
Productivity
Increasing labour productivity has been a success story for the aquaculture industry. Between 1990 and 2002 annual smolt production per person had increased by 70 per cent whilst average salmon output per worker was over 5 times higher (Chart 4.2.5).
The dramatic increases in productivity reflect innovations in production technology and biology, as well as economies of scale. Further to this, there have been improvements in the survival rate of smolts, in the average weight of fish at harvest, in the utilisation of seawater tanks & freshwater cages plus the introduction of new operating equipment such as larger cages, feed barges etc.
The improvement in breeding success, survival & growth rate of fish has meant that the volume of salmon per unit input of smolts has increased by 158 per cent between 1990 and 2002, from 1.2 to 3.1 tonnes of salmon per 1,000 smolts (Chart 4.2.6)
The rapid technical progress has required heavy spending on Research & Development (R&D) work and investment in plant & equipment. Consequently, the capital requirements have steadily increased. This has given rise to economies of scale with larger companies being best placed to undertake the R&D and investment in new technology. In addition, their greater size gives them stronger market power for dealing with the retailers who in turn are dominated by the large multiples. This has allowed the larger companies to negotiate longer term contracts giving them more stable prices and less reliance on the spot market.
The increase in economies of scale has allowed larger companies to gain market share at the expense of smaller ones, with the result being that whilst production has grown the number of companies has declined as the industry has consolidated. There has been a reduction of 45 per cent in the number of salmon producing companies and of 25 per cent in the case of smolt producers (Chart 4.2.7).
The inevitable consequence of such trends is that production has been concentrated into larger and fewer firms that operate bigger farms. Chart 4.2.8 shows how the output share of sites in each size bracket has changed. Since 1998 more than half the production of the salmon farming industry has been produced by sites with an output in excess of 1000 tonnes. Such sites saw their share of output rise from an average of about 9 per cent in the 1992-1993 period to 62 per cent in the 2001-2002 period. In contrast, the share of production from sites of less than 100 tonnes fell from an average of 6 per cent to 1 per cent over the same period, whilst the share for the 100-500 tonnes size category declined from 27 per cent to 7 per cent.
Economies of Scale
When the trends in output per head for different categories of firm size are compared 3, it is clear that labour productivity is closely related to size of company (Chart 4.2.9). The larger the output of a company then, on average, the higher the output per head. This implies that production costs per unit of output will be lower and, hence, that larger companies are likely to be more competitive than smaller ones. This helps to explain the trend towards larger and fewer companies as the larger ones buy out their weaker competitors.
Since there is evidence for economies of scale, based on average levels of labour output per head, it might be expected that growth rates in labour productivity would also be positively related with size category of firm. The slope of the trend line in Chart 4.2.9 reflects the rate of growth in labour productivity indicating that the largest producers, those with an output in excess of 1000 tonnes are, on average, experiencing faster productivity growth than the smaller producers.
The largest producers, with the highest productivity, tend to be concentrated in Shetland, with the smaller companies disproportionately represented in North West Scotland. A comparison of Charts 4.2.2 and 4.2.4 shows that Shetland has a higher share of output than of employment, whilst the converse is true of North West Scotland.
Total Employment Related to the Production of Salmon in Scotland
The increase in salmon output since the late 1980s has resulted in a growing number of jobs dependent on its production. Employment in the smolt producers and salmon growers has remained static because of the sharp rise in labour productivity. However the higher output has stimulated increases in employment elsewhere in the economy, most notably in downstream activities such as salmon processing.
There were 1,711 full and part-time jobs in smolt and salmon production in 2002 and 5,665 full and part-time jobs in salmon processing in 2001 4. Hence, there were 7,376 full and part-time jobs in salmon production and processing. Virtually all the processing jobs depend on Scottish farmed salmon. Less than 1.5 per cent of the salmon purchased by Scottish processors is provided by imports. The rest, apart from 0.1 per cent which is wild caught, comes from Scottish farms.
Estimates of jobs in suppliers & dependent on consumption multiplier effects can be made using the multiplier coefficients estimated in the report The Economic Impact of Scottish Salmon Farming, PACEC, March 1999 5. These produce the estimates for salmon related jobs shown in Table 1.
The best estimate is that in 2001-2002 there were about 10,000 full and part-time jobs dependent, either directly or indirectly, on salmon growing and salmon processing in Scotland. Of these just over half (5,300) were located in the Highlands & Islands. In full-time equivalent (FTE) terms, the estimates are 8,600 jobs in Scotland and 4,800 in the Highlands & Islands
Conclusion
The salmon growing industry has experienced a rapid growth in output over the past 15 years. The growth has been made possible by the dramatic increases in productivity, which have allowed the reduction in production costs to be passed onto consumers in lower prices. Such prices have stimulated demand which, in turn, has led to increased output. Despite the productivity increases, employment in salmon farming has been maintained because of the marked increase in output. The very large increase in supplies of salmon has allowed salmon processors to expand their output and to increase their employment. It is estimated that salmon production and processing now supports about 10,000 full and part-time jobs in Scotland and 5,300 in the Highlands & Islands. In FTE terms, the jobs are 8,600 and 4,800 respectively compared with the equivalent estimates of 6,400 and 4,700 jobs in 1996 6.
Footnotes
1 The Scottish Executive (2003). A Strategic Framework for Scottish Aquaculture". The Scottish Executive.
2 Fisheries Research Services (Annual). The Annual Production Survey of Scottish Fish Farms, Scottish Executive. The latest report is available on the Scottish Executive web site. Owing to changes in the way some data have been recorded the length of the time series vary from one indicator to another
3 The annual fluctuations in the output per head figures have been smoothed out by fitting a trend based regression line to the figures for each size group. This makes it easier to identify the underlying trend.
4 Macpherson Research (January 2003). Salmon & Trout Processing in Scotland: A Review of the Industry in Scotland in 2001. Report prepared for SEERAD.
5 PACEC (March 1999). The Economic Impact of Scottish Salmon Farming. Economic Research Paper No.7, The Scottish Office.
6 PACEC (March 1999). The Economic Impact of Scottish Salmon Farming. Economic Research Paper No.7, The Scottish Office.
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