Tassal Group Strategic Thoughts, page-335

@optimistus Thanks for contributions, and indeed I think there is some value in delving into the question 'commodity or premium product?'

We probably need to differentiate salmon and prawn. For prawns, I think there will be some premium pricing and marketing. The larger the prawns, the more that they sell for per kg. Tropico has been expanding the growout size of the prawns, and have pushed them from around $24/kg to $32/kg (sans discounting) at the retail end. This has increased the EBITDA/kg margins - I think when they had a small prawn season it was in the high $4s, and typically their aiming for low to mid $6s for full size.

The other aspect of prawns is that they can get a premium over Asian because they have an all-year-round capability for delivering fresh prawns - never frozen or thawed. This is not just a premium for cafes, hotels, but is also something becoming accessible now through the major supermarket chains in the deli section. For this reason, Tropico has been quite successful with their import-substitution strategy. They have 10xed their volume and not diminished the price, but rather increased it. To my mind, the price premium they get is reflecting of it being a premium product at least for now in some sectors of the market.

For salmon, I tend to think its a commodity. Though I don't agree with the comment "A commodity producer without a Premium Brand (and therefore limited pricing power) simply isn't an attractive investment (not for me at least)" - Twiggy Forrest's Fortescue metals sells a commodity product, and he has made a fair whack out of that. Moreover, he got interested in salmon, and I rate Twiggy as Australia's best cyclical investor.

To my mind, if you are producing a commodity, what is most important is to be on the lower end of the cost curve. Prices are set at the margins, and if you are a lower-cost producer then you can make money throughout the full cycle. Tassal produces at a cheaper rate than Huon or Petuna locally, and is cost competitive at 40-45NOK / KG with some of the larger Norweigen producers. I think this gives it an advantage.

The other thing is that salmon and chicken is surprisingly different. Chicken can't be exported - costs are prohibitive, which is why you see chicken farms dotted around urban centres. This also means a distributed production system. So it's much harder to get economies of scale and out-compete your competitors based on efficiency. Meanwhile in salmon, it is a centralised production system based around where growing conditions suit best - and these aren't expanding, with licenses across the world for salmon production remaining relatively constrained. I could go out tomorrow and set up another chicken farm in outer Sydney or Melbourne with a fancy logo and compete against Steggles and Inghams based on the quality of my ciabata battered nuggets, but I can't simply go out and get marine licenses to set up a salmon farm. Also, if I have excess supply in my chicken, all I can do is grind it up and put it in pet food. For salmon, I can freeze it, smoke it, export it fresh, etc. And it is this export component of salmon has cyclical prices, which the better operators can use as an edge. It also reduces some of the buyer-power with the supermarkets, and enables slightly higher returns on invested capital than what the chicken producers can negotiate with Coles/Woolies.

Anyway, I don't think it's so bad investing in a cyclical commodity at bottom-cycle prices when global demand structurally outstrips global supply.