Where is the salmon market drifting?
This article was featured in Eurofish Magazine 2 2024.
Not so long ago, salmon was inexpensive and affordable for everyone. Market analysts even talked about the ‘democratisation of luxury’. Those happy times are gone now that the price of salmon has soared. Retailers, smokehouses, and processors complain about price volatility, and many consumers are already giving up the once popular fish. What will happen if the withholding tax comes into effect?
The development of aquaculture has made farmed salmon widely available to consumers in a variety of product forms and has been inexpensive for a long time. This has paid off for all parties involved, with a significant increase in demand and sales volumes. Since 2014, salmon has topped the ranking of the most popular fish species on the German market. Salmon is also in high demand in other parts of Europe. This benefits the Norwegian salmon industry in particular, which has done pioneering work and invested heavily in the development and implementation of sustainable farming technologies. The Norwegian salmon industry has grown rapidly since its inception in the 1960s and today, including its holdings in Chile, Scotland, and other countries, accounts for almost 70% of all Atlantic salmon produced in aquaculture worldwide. In 2021, total global production was more than 2.8 million tonnes of farmed salmon. By comparison, only 705,000 tonnes of wild salmon were caught, mostly in the Pacific.
Steady growth over decades
In order to grow and improve the efficiency of its aquaculture, Norway has also made important contributions to improving salmon farming and has developed innovative disease prevention technologies that make the use of antibiotics redundant. All this has led to the Atlantic salmon (Salmo salar) becoming the world’s most produced salmonid species. Between 2005 and 2017, the amount of Atlantic salmon produced worldwide grew by almost 5% annually. However, growth slowed to just 4% after 2017, as Norway’s regulatory authorities were reluctant to issue additional farming licences due to the unresolved salmon lice problem. Despite the lower growth in volumes, the value of sales of Atlantic salmon produced globally in aquaculture more than tripled between 2009 and 2021! The average market price of salmon was EUR 6.72 per kilogram in 2016, falling to EUR 5 in 2020, but rising sharply after 2021. The average price for 2022 is quoted at USD 7.89 per kilogram. This means that the price of salmon has risen the most compared to other protein-rich animal foods for human consumption. Many salmon buyers are already wondering how long this will last. Based on market developments, analysts expect prices to fall slightly in the medium term and could stabilise at around EUR 6.15/kg. However, it is doubtful whether this will actually happen. This forecast is not reassuring, as this price would be roughly double that of ten years ago.
However, anyone expecting salmon farmers to be overjoyed by this trend is mistaken. The industry is struggling with problems such as salmon lice, rising feed costs, inflation, and stricter environmental regulations. This was exacerbated by the decline in demand during the covid-19 pandemic, as restaurants and other catering establishments in many countries that are major buyers of salmon were forced to close due to lockdowns. This led to a short-term oversupply of salmon and a drop in prices. Fortunately, the impending sales crisis was absorbed by the retail sector, which reacted quickly by making more salmon available and supplying end consumers with salmon to their home offices. However, the temporary low price phase, if it can be called that, was only a brief episode, as prices rose sharply again shortly afterwards, reaching a record high of EUR 11/kg in mid-2022. This dampened the desire to buy in Europe – the EU is the largest and most important market for Norwegian salmon, but not everywhere in the world. Salmon is also becoming increasingly popular on more distant continents. Demand has been boosted in particular by the growing supply of fillets and value-added products. Few other varieties of fish or seafood can compete with salmon in this respect. According to the Food and Agriculture Organisation of the United Nations (FAO), the value of trade in salmon has grown at an average annual rate of 10% since 1976, and since 2013 it has been ranked as the most economically valuable resource in the entire seafood sector in terms of commercial value.
High salmon prices weaken demand in Germany
However, the limit seems to have been reached, at least in Germany, the largest buyer of salmon in Europe in terms of volume. Consumers, who are already price-sensitive and now also suffering from inflation, are less likely to choose their former favourite fish. In 2022, salmon lost its long-standing top position in seafood consumption to Alaska pollock. In an online price check in mid-August 2023, the prices for salmon fillet with skin were EUR 19.98/kg (lachs-direkt.de), EUR 24.99/kg (Deutsche See offer), and EUR 28.34/kg (Metro), depending on size and trimming level. Norwegian salmon halves were the cheapest at 16.99 euros/kg at the Lidl discounter, although these were defrosted products. Discounters such as Aldi and Lidl are the main addresses in Germany when it comes to selling fresh fish. They account for exactly 45%, i.e. almost half of this market segment. This success was fuelled by the introduction of self-service 300 gram MAP trays, which increased fresh salmon sales tenfold. The average German consumer has little affinity for fish. Per capita consumption of 14–15 kg per year is more than a quarter below the European average. Nevertheless, the importance of the German market cannot be underestimated because of its large population. Direct exports from Norway account for around one-third of the German salmon market. The rest is imported in processed form from EU countries such as Poland, the Baltic states, Denmark, and the Netherlands.
Driven by the desire for a healthy, high-quality, protein-rich diet, the global demand for salmon is growing. This may be why the Norwegian government proposed a ‘withholding tax’ in September 2022, which should apply from 1 January 2023. Increasing purchasing power and the growing interest of salmon buyers in many regions of the world seem to ensure the future of the Norwegian salmon industry. It has been generating attractive profits for many years. Nevertheless, the question remains whether this promising outlook will not be undermined by the introduction of an additional tax on salmon and trout farmers. Prime Minister Jonas Gahr Støre justified the idea as follows: ‘In Norway, we have a long tradition that the values created through the utilisation of our shared natural resources should also benefit society as a whole.’ Therefore, the time has come to introduce a resource rent tax for the aquaculture industry. The government’s original proposal included a 40% VAT charge for farms producing at least 5,000 tonnes of salmon or trout per year. The tax should only be levied on the added value created during the offshore fattening phase.
Corporate withholding tax reduced from 40 to 25 per cent
As expected, the consultation on the pros and cons of corporate withholding tax proved difficult. Representatives of the salmon industry threatened that the new tax will leave large salmon companies with a lack of incentive to buy more production licences, which could lead to a drop in production and an erosion of the taxable pool. In the face of persistent political opposition, the coalition government reduced its tax proposal in March 2023, initially to 35% and then to 25%, in order to secure a majority in parliament. After eight months of intense debate, it took another four hours in the Storting before the controversial draft was approved by 93 votes to 76. Although the tax rate has been reduced from the originally proposed 40% to 25%, combined with existing taxes it doubles the effective tax burden on salmon and trout farming businesses. Therefore, they are unlikely to be comforted by the fact that the additional revenue will benefit the counties where the farms are located. The funds will be used to strengthen environmental protection and finance innovation in aquaculture. Although payments will not begin until 2024, the withholding tax is to be levied retroactively from January 2023. According to a rough estimate based on current salmon prices and exchange rates, the 25% tax contribution is likely to cost the salmon industry around NOK 5.7 billion, or approximately EUR 480 million.
The salmon industry now lacks this money to invest in new farms and modernise existing farms, which would be urgently needed to meet the demand in the global seafood market, and to withstand global competition. The long-term consequences of this for the industry are difficult to predict. Especially as the industry is currently in a phase of technological change. Salmon farms are increasingly being relocated offshore or onshore, which is extremely capital-intensive. Falling yields are discouraging many investors and slowing the growth of production capacity. The Norwegian Seafood Association estimates that in the four months between the first 40% tax proposal in September 2022 and January 2023 alone, investments worth around NOK 35 billion (EUR 3.2 billion) were postponed or cancelled.
Salmon industry threatened with economic losses
Grieg Seafood and the world’s largest salmon producer Mowi put all new structural investments in Norway on hold shortly after the withholding tax was announced. The new tax is neither sustainable nor forward-looking, criticises Geir Ove Ystmark, managing director of the Norwegian Seafood Federation, especially as it imposes a huge administrative burden on companies. The months of uncertainty as to the actual level of the tax have already had a deterrent effect on many companies. Publicly traded companies have seen their value fall, hundreds of workers have been made redundant, and planned purchases of license capacities have been cancelled as a precaution. Cermaq, Mowi, and Lerøy Seafood Group have cancelled their investment projects for land-based salmon farms. Mowi has cut 435 jobs to save costs. SalMar has announced that it will lay off 851 employees. The rigorous move was explained by the government’s salmon tax plans, which allegedly destroyed the market for long-term fixed price contracts. Representatives of the Lerøy Seafood Group also argued that the tax plans would have significant negative consequences for their day-to-day business and long-term effects on Lerøy and the industry as a whole.
In fact, these fears are not entirely unfounded. Immediately after the announcement of the new tax, the value of salmon companies’ shares on the Oslo Stock Exchange plummeted by several billion kroner. Mowi’s share price fell to NOK 140 (EUR 11.82) per share in September 2022, the lowest level in five years. SalMar and Grieg Seafood share prices almost halved within a few days. It was only after the agreement in the Norwegian parliament and the announcement of the 25% tax rate that the share prices of the three companies rose again. However, the salmon industry is already facing new difficulties. The Norwegian government has announced that an independent committee will calculate and set the corporate withholding tax annually on the basis of salmon prices. This ‘Salmon Tax Pricing Board’ should include at least five experts, who will also take various qualities, fish sizes and contract and spot prices into account when determining prices. Fixed tariffs set by the Pricing Board would simplify the bureaucratic burden on tax authorities and aquaculture businesses.
Fixed tax is not expedient
However, the salmon industry is critical of this idea and instead insists that the tax rates should be based on the prices actually achieved. Salmon is not a uniform product, but comes in different sizes and qualities, with different types of contracts and end markets. As a result, fish of the same size and quality may be priced differently on international markets. This requires a differentiated view of the price landscape. Processed salmon is usually sold under fixed-price, fixed-volume contracts, which are often below the reported spot price. Even these few examples show that salmon pricing is much more complex than in other industries, for example in some technical areas. An external panel, which calculates average salmon prices from Nasdaq data, cannot adequately reflect this diversity. The Salmon Tax Pricing Board cannot exclude with sufficient certainty the possibility that a company may have to pay tax on income that it has not earned.
However, regardless of the specific decisions taken by the Norwegian government, it is clear that a corporate withholding tax will reduce the profits of the salmon industry. This means that it will have less of its self-generated capital and its attractiveness to investors will gradually diminish. The impact this will have on access to fresh capital, which is urgently needed for innovation in the salmon sector, is currently unforeseeable. The salmon industry fears the economic impact on downstream industries such as feed manufacturers, wholesalers, and primary processors, all of which could gradually weaken the market position of Norwegian salmon. This, in turn, could affect the price of salmon and the profitability of the industry as a whole and lead to an erosion of Norway’s competitive advantage.
All signs continue to point to growth
While some of these arguments are perfectly understandable, the drama of the scenario painted seems exaggerated. Despite the new corporate withholding tax, Norway will remain Europe’s most important supplier of salmon and a dominant player in the global salmon industry. In 2022, Norway’s salmon industry achieved record export revenues of NOK 105.8 billion (around EUR 9.7 billion), an increase of 30% compared to the previous year. Salmon remains in demand worldwide, and demand is likely to continue to increase.
In 2022, the global salmon market amounted to just over 3.5 million tonnes (farmed and wild salmon combined) with an estimated market value of USD 30.87 billion. The forecasts for the compound annual growth rates (CAGR) differ slightly. However, both IMARC Group (plus 3.54% annually over the period 2023–2028) and Research and Markets (plus 3.9% annually over the period 2023–2027) expect a long-term upward trend. If these projections are correct, in 2027 or 2028 the global salmon market will be worth just under USD 38 billion, with 4.3 million tonnes of wild and farmed salmon. A very promising outlook, especially for Norwegian salmon farmers. What this means for salmon prices, on the other hand, is another matter. For the buyers of salmon, i.e. the smokehouses, the processors, the fishmongers and, ultimately, for the end consumers, there is probably not much cause for optimism in this regard.
Manfred Klinkhardt