Really interesting story for Salmon farming, value add products...

Really interesting story for Salmon farming, value add products and resilience in companies.


A case study

Bakkafrost is a vertically integrated salmon farmer operating in the Faroe Islands
and Scotland. Salmon farming is a lucrative but complex business, particularly when
managing the whole value chain in-house: from genetics to eggs, hatcheries to smolt
operations, salmon feed to at-sea transport, grow-out, harvesting, processing, sales, and
logistics.
The whole process takes about 30 months from egg to harvest, and any small
mistake or unusual weather conditions means you have to rethink your entire process.
After two and a half years of expenses and hard work, the market price for salmon can
vary wildly (salmon prices have been every bit as volatile as Tesla shares).

A choice every salmon farmer has to make is what to do with the fish once it is ready to harvest.
Do they sell their fish to wholesalers and other processors, or do they take it a step further,
converting some into filets or smoked salmon that goes straight to the grocery store?
This latter step is called Value-Added Processing or VAP, and Bakkafrost aims to sell
about 30–40% of its fish through this channel each year.

Despite the name, the economics of Value-Added Processing are anything but
obvious. Bakkafrost’s VAP business will often swing between large gains or losses
depending on how salmon prices move every few months, and though the swings
balance out over time, the average contribution is hardly worth writing home about. In
the ten years from 2011 to 2020, Bakkafrost has reported cumulative revenues of about
€4.5 billion and operating earnings of €1.1 billion, yet of those earnings only €14
million, or 1.2% of the total, have come from their VAP division. A financial observer
might say, quite rightly, why bother?

Salmon farming is hard enough, why dedicate additional capital and resources for a pittance?
What a financial owner doesn’t see—and which the owners of Bakkafrost see plain as day—is the resilience this seemingly
irrelevant processing step embeds in the organization. Their VAP business lets them
choose which customers they want to serve and how. And being able to choose your
customer can add mightily to one’s resilience in times of stress, as was the case last year.
When hotels and restaurants shut their doors last year, all the food that was headed
to this channel, including many millions of whole salmon, all needed to end up
somewhere.

Remember the 30-month lag between laying eggs and the salmon harvest?
This means that while the demand for whole salmon evaporated, supply kept pouring
in and the markets were soon stuffed full of whole fish with no one around to buy them.
Prices tanked, and producers were desperate for buyers. People were still buying salmon
at grocery stores—often more than before because they weren’t eating out so often—
but the average customer there has no use for a whole head-on, gutted, six-kilo salmon.
In contrast, an extra filet or pack of smoked salmon would be an easy purchase.

As the market demands rapidly shifted, Bakkafrost turned their VAP machines on full blast
and delivered more fish to this one market that stayed open (40% more fish were sold
in this channel than in the prior year). This kept them in the market, took the strain off
the rest of the business, and earned them a modest but extraordinary financial reward.
When Bakkafrost expanded their VAP division in 2016 they did not have anything like
Covid in mind, but they did understand and value the importance of adding resilience to their business.

EDELWEISS JOURNAL 6 XX – 7 JULY 2021©2021 Edelweiss Holdings plc. All rights reserved.