IN THE MATTER of the Resource Management Act 1991

Transcription

1 IN THE MATTER of the Resource Management Act 1991 AND IN THE MATTER of a Board of Inquiry appointed under section 149J of the Resource Management Act 1991 to consider The New Zealand King Salmon Co. Limited's private plan change requests to the Marlborough Sounds Resource Management Plan and resource consent applications for marine farming at nine sites located in the Marlborough Sounds STATEMENT OF REBUTTAL EVIDENCE OF RAGNAR OLAV NYSTØYL IN RELATION TO GLOBAL DEMAND FOR KING SALMON FOR THE NEW ZEALAND KING SALMON CO. LIMITED AUGUST 2012 D A Nolan / J D K Gardner-Hopkins Phone Fax PO Box DX SX11189 Wellington

2 TABLE OF CONTENTS 1. INTRODUCTION 1 2. SCOPE OF EVIDENCE 1 3. WENDY MCGUINNESS 1 4. ANTHONY E. WEBER 4 5. TIMOTHY JOHN HAZELDINE 5

3 EXECUTIVE SUMMARY A B C D E F G I have reviewed the relevant statements of evidence that raise issues that relate to my EIC, particularly where they question the approach taken in the Kontali report attached to my EIC. In this statement of rebuttal evidence I respond to such issues raised by Wendy McGuinness, Anthony Weber and Professor Timothy Hazledine. I remain very confident in my view that I expressed in my EIC (and in the Kontali report) of the likelihood that demand for farmed salmon will outstrip supply in the years towards Nothing that I have read in the evidence filed by the individuals above has made me change this view. I agree with Ms McGuinness that the farmed salmon industry is volatile, but in my opinion this does not mean that it is not also a sustainable industry. I find the way that Professor Timothy Hazledine concludes on the fact that farmed Chinook constitutes only 1 % of the total farmed salmon and trout supply, is consistent with 99 % of farmed salmon consumers not being willing to pay a 30+% premium to be misleading and a hazardous simplification In reaching that conclusion, I also feel that Professor Timothy Hazledine too hastily, and without documentation, is concluding that the market for farmed Chinook is to be considered an insulated niche segment without any interaction with or from other farmed salmon species There are quite a few factors that I feel that Professor Timothy Hazledine has either overlooked, or chosen to disregard, when assessing the likely demand and market prospects for farmed Chinook from New Zealand: - Anticipated strong growth in population, and disposable income in markets where fresh salmon from New Zealand has logistical advantages (Oceania & Asia) - A current low presence of farmed NZ Chinook in many of the major growth markets for farmed salmon, allowing for access to niche positioning as total salmon demand increases and matures - Existing regulatory limitations or thresholds for rapid production expansion in other salmon farming regions, that will limit the overall potential production growth over the next 8 10 years.

4 1 1. INTRODUCTION 1.1 My name is Ragnar Olav Nystøyl. I am Managing Director of Kontali Analyse ("Kontali"), and have held various senior positions within the company since My qualifications and experience are set out in my statement of evidence-inchief ("EIC") dated [22] June I repeat the confirmation that I provided in my EIC that I have read, and agree to comply with, the Code of Conduct for Expert Witnesses The purpose of this statement of rebuttal evidence is to address matters raised in the statements of evidence filed by submitters that relate to my EIC, particularly where they question the approach taken in the Kontali report attached to my EIC. 2. SCOPE OF EVIDENCE 2.1 My rebuttal evidence will address matters raised in the evidence of: (a) (b) (c) Wendy McGuinness; Anthony Weber; and Professor Timothy Hazledine. 2.2 I focus on the key issues and where a submitter has raised a matter within my area of expertise that I have not addressed in this statement of evidence, this is not to be taken as acceptance of the matters raised. 3. WENDY MCGUINNESS 3.1 In paragraphs 7.13 and 7.15, pages 8 & 9, Ms McGuinness states a clear doubt towards the correctness of the trend presented in our report page 20, regarding the New Zealand market/consumption of salmon. The doubt appears to primarily be driven by the fact that New Zealand Salmon Farmers Association ("NZSFA") is cited as the source and the close relationship that exists between NZ King Salmon and NZSFA.

5 2 3.2 Whereas the sources cited and used are an elaboration of trade data, in addition to production figures from NZSFA, Ms McGuinness appears to have understood this as all data are supplied by NZSFA. This is not the case, as official and unbiased trade statistics from all major countries involved in trade of salmon products (10-12 countries), are cross-checked to verify and produce a "salmon net-supply trend" like the mentioned graphs is depicting. 3.3 In paragraphs 7.17 and 7.18, page 9, Ms McGuinness questions the term "likely" used in my statement concluding that demand for farmed salmon is expected to be higher than the growth in production. She claims that no indication of the range of "likely" is given. I have tried to support the likeliness by indicating ranges for both how we expect demand for farmed salmon to develop, and a corresponding prognosis on an expected production. The following quote can be found on demand (page 24): While we do expect the average annual global demand growth for farmed salmon to be in the range between 6-8 % in the years towards 2020, this is higher than what we expect the average annual supply-growth will be. 3.4 Though a direct statement on the expected production growth from now on and towards 2020, is not included, there are graphs and tables that indicates the same, i.e. Table under chapter 4.4, on page 24, stating a total production of tonnes in 2011, and tonnes in 2020, which gives a 5 % annual growth. If the doubt Ms McGuinness has on the wording likely, is to how strongly I see the likelihood of demand for farmed salmon outstripping supply by 2020, I can confirm that I am very confident that such will take place. 3.5 The same expectations can be read from the last graph under chapter 5.1, on page 26, where the anticipated annual growth rates from 2011 till 2020 are shown graphically. 3.6 As a market economist, and more precisely a salmon market economist by occupation, I have the experience and the humility to not be presenting evidence on demand going beyond 8-10 years ahead. For the same reason, addressing the Board of Inquiry, the term likely is also carefully chosen (I understand that the duration of consent sought in the applications is 35 years, but don't consider it appropriate for me to forecast economic demand for 35 years away. Many salmon farm licences in other salmon producing regions have long terms but that does not mean evidence for demand can or could be accurately provided for that entire period. Obviously, we do not foresee a

6 collapse of the market or anything like that, but uncertainties out that far get very great) In paragraphs 7.20 and 7.21, page 9, Ms McGuinness is also questioning whether the assumptions over the limitations to growth, and increasing demand is generally agreed within the wider industry, using a few News articles to underline the fact that salmon prices are currently low and under pressure. These are not at all contradictions, as the report focuses on the long term expectations, and also clearly includes and incorporate the current situation, where a historically high year-on-year supply growth is taking place, with low prices as a result. See Kontali Report, Chapter 2.6 "Market Trends Primo 2012", page As a very recent example of an industry view, the statement from Faroese salmon farming company Bakkafrost, in their Q presentation, can be mentioned. Commenting on the results, CEO Regin Jacobsen said: The result for Q was satisfying. All segments had positive result and thus contributed to the group result. The salmon price, during the Q2 2012, has been satisfying taking into account that we have seen a massive increase in the supply of salmon. The outlook is also good as we don't expect the same increase in the supply from Q and forward, which means that the marked will be more in balance. 3.9 In paragraphs 7.23 to7.26, page 10, Ms McGuinness spends quite some time elaborating her belief that the salmon industry is a volatile industry, and that it will remain so in the future. The fact that the salmon industry is a volatile industry, is a fact that has been known for decades already. There is however no contradiction between a volatile industry, and a sustainable and profitable industry. In a volatile but still profitable industry, it is just a matter of the results fluctuating more from year to year around a profitable average And I would question the conclusion in paragraph 7.23 that does not feel that there is a strong industry view that the (current) situation will not right itself. There are such views present in the majority of the industry, and sufficient examples on that can be found among Stock market analysts, CEO s of listed companies etc. Similar situations has also arisen in the past and always righted themselves The graph below shows the average operating margin of all Norwegian companies owning 6 licenses or more (over the selected time-span, representing between 60 and 90 % of the industry). The industry is clearly volatile, but has on average been profitable.

7 4 Figure 1: Historical Financial performance Norwegian Salmon Farming Companies (Middle-Sized Large) 3.12 Lastly, in paragraph 7.5, page 7, Ms McGuinness explains that she would have expected a deeper and broader analysis, providing for what I understand she refers to as a range of future market prices, and in para 7.25, page 10, she would be looking for a great deal more detail and clarity over a longer time frame (i.e. 35 years). The truth is that the salmon industry is still a relatively new industry, when comparing today's level of global coverage, level of industrialization etc. For instance, if we look back 35 years to the mid-70'ies, the largest salmon farming nation; Norway, produced less than tonnes, and very few of the pioneers at that time envisaged a volume that would ever surpass tonnes, the market was never believed to be large enough! 4. ANTHONY E. WEBER 4.1 In Mr. Weber's statement there are not so many references made to the Kontali Report. He appears to be drawing a conclusion (paragraph 48) that the same relation between supply growth/reduction, and changes in price that has been observed on farmed Atlantic salmon, is also true for Chinook salmon. In the Kontali Report, this is not stated, and the point about the relationship between changes in supply & prices, is made in order to indicate that the expected rate at which production will grow for the coming 8-10 years, is lower than this, and thus creating an environment for profitability,

8 and market opportunities for other species, being close substitutes to Atlantic salmon In paragraphs 49 51, the annual growth rates pointed to by Weber, is found by using 2012 as a base year, with the capacity as base level. Choosing actual production in 2011 (7 660 mt - apparently being the highest achieved so far under current capacity), the compound annual growth rates become 12.4% rather than "at least 13%". "In excess of 16%" becomes 15.5%, and "in excess of 20%", becomes 18.3%. 4.3 In paragraph 52, these annual growth rates are held against what Mr. Weber refers to as "the 4-5% growth in the world-wide demand predicted by Kontali Analyse", with a reference made to p 25 and 26 of the Kontali Report. The report never mentions any specific expected growth rate for farmed Chinook salmon, as we believe farmed Atlantic salmon and farmed Chinook salmon being close enough substitutes to review the farmed salmon outlooks as a whole, not by specie. 4.4 Also the reference to a "predicted 4-5% growth in demand" is false, as the comments made on page 25 refers to the anticipated production growth. 4.5 On page 24, our anticipation of a global demand growth for farmed salmon is however stated, quote: While we do expect the average annual global demand growth for farmed salmon to be in the range between 6-8 % in the years towards TIMOTHY JOHN HAZELDINE 5.1 Mr. Timothy John Hazledine, starts his comments on the market for NZ produced king salmon by stating two purposes for "assessing the likely future market demand for NZ-produced king salmon: (a) (b) Partly, to correct some confusions and errors that have been brought into the case by NZKS consultants Mainly, to find for himself a number to use in a cost-benefit analysis, more precisely being the amount of additional farmed king salmon that could reasonably be expected to be presented to the market.

9 6 5.2 In paragraph 48, page 14, Hazledine presents a straightforward simplified explanation to the relationship between the fact that farmed Chinook represents slightly less than 1% of the total farmed salmon & trout volume available, and a price premium of 30+%. At the moment, fewer than one percent of the customers purchasing farmed salmon are willing to pay the premium of 30+% for king salmon. The other 99 % are not willing to pay this premium. 5.3 First of all, we don't see why this comment is at all very relevant: Given the proposed production increase in the NZKS plan, farmed Chinook would by 2020 still constitute only slightly above 1% of the total, and there is no real need for other customers to switch. The increase in demand would only need to come from: (a) (b) (c) increased average consumption per consumer; increased population (the world population is expected to increase by 700 million from today and towards 2020 the change itself being more than two times the population of USA); or new salmon consumers not having been exposed to or had the opportunity to purchase salmon so far (Improved standard of living, more modern retail and more efficient refrigerated transport value chains will certainly increase salmon's exposure over the next decade). 5.4 The simplification that 99% of farmed salmon consumers are not willing to pay a 30+% premium is misleading, as the low absolute volume of Chinook available, also contributes to a wide range of consumers not having the option of paying a premium for farmed Chinook. Farmed Atlantic salmon is currently available in some kind of product-form in more than 170 countries around the world. Farmed Chinook is today exported and sold to less than 40 countries, many of these insignificant in terms of population. 5.5 In paragraph 50, page15, Hazledine makes a point on the reservation that we have made in the Kontali report, on having sufficient data and facts to substantiate our belief that there will be demand for another tonnes of Chinook from New Zealand by This reservation is made expressively to inform potential readers that it is our belief, it is not a fact. We believe there are too many factors influencing demand for any given product 8-10 years ahead, for anyone to be able to guarantee for such. Kontali acknowledges the difficulties in forecasting future global demand for a protein segment

10 7 (farmed Chinook salmon), that eventually can be substituted by other salmon, other seafood, or even meat protein. We do however put our experience as one of the world s leading salmon market research institutes for soon 20 years, behind our belief. In paragraph 52, page 15, Hazledine goes on in applying recognized supply and demand-theory, claiming that substantial increase in supply, will not be accepted by the market without a cut in price. We do also recognize and acknowledge these theories, but differ in opinion with Hazledine in whether farmed Chinook is an insulated niche segment, without any interaction from what happens with farmed Atlantic salmon. 5.6 In paragraph 53, page 15, Hazledine uses the graphic presentation showing the relationship between change in global supply of Atlantic salmon, and the corresponding changes seen in first hand prices in Norway, to arrive at a price elasticity of demand of around -4, just eyeballing the graph. 5.7 Quite a few academic studies have been performed on price elasticity on farmed Atlantic salmon, and scientific literature discussing this is easily found. One recent study, and perhaps one of the most thorough in terms of broadness and complexity of data-sets used, was performed in a joint project between industry and academia, where reputable personnel on seafood market studies and other farmed commodities were involved, The University of Stavanger in Norway, the University of Tromsø in Norway, the Department of Agricultural Economics - Texas A & M University, and the Norwegian Agricultural Economics Research Institute, along with the world largest salmon farming company, Marine Harvest. Kontali Analyse was also part of the project.among other findings, the long run price elasticity of demand for Norwegian farmed salmon, was in this study found to be -0, In a study from 2009 (Xie, J., H.W. Kinnucan, and Ø. Myrland Demand Elasticities for Farmed Salmon in World Trade. European Review of Agricultural Economics 36: ), the price elasticity of demand for fresh farmed salmon was found to be -0,98. This study also quotes: Interestingly, as these studies have been performed on increasingly longer and newer time-series, results suggest that the demand for farmed salmon has become less price elastic over time. 5.9 Still being a sector in its "industrial youth", we find that there is no reason why this trend should not continue over the next decade In a very recent publication from 2011 ( F. Asche and T. Myrland, The Economics of Salmon Aquaculture, Wiley-Blackwell: Chichester ), the findings

11 from a wide range of studies may be summarized through the following quote (Chapter 7, page 133): 8 According to most studies salmon demand is fairly elastic in own price, so that a one per cent decrease in the price of salmon will lead to a more than one per cent increase in salmon demand. However, the magnitude of the elasticity is becoming smaller as the supply has been increasing, and for some species or product forms it already seems to be inelastic. If the supply of salmon continues to increase, it is most likely only a matter of time before aggregate demand for salmon becomes inelastic. In fact, it may already be inelastic, since most studies use older data sets, and elasticities reported at the mean will contain substantial weight from data from the 1980s Still, we have chosen to present our views and projections in the Kontali report, based on a slightly different approach, not having found any similar published studies on farmed Chinook, and at the same time acknowledging that from our side (Kontali and colleagues at mentioned universities), there has not been time nor academic resources available to perform the needed data collection and analysis on farmed Chinook alone. As far as we can see, there is no scientific paper nor any profound analysis on price elasticity of demand on farmed Chinook salmon supporting the conclusions made by Hazledine neither Mr Hazeldine has taken a very theoretical approach to his consideration of the issues and our report. We have chosen a different approach in presenting our views, which is a more direct and hands-on with industry signals and trends kind of analysis. It is an approach and an industry, which we have lived and prospered with for nearly 20 years That said, I respond further to some of Mr Hazeldine's comments below, to try to assist the Board in its considering the issues In paragraph 58, page 59, Hazledine has made thorough comments on one of the two graphs that I included in the Kontali Report to illustrate two major points: (a) Firstly, by the first graph (Average Import Price Japan; Fresh whole salmon, page 14), how market prices for fresh farmed salmon, with variety both in specie and in origin, have correlated throughout a number of years. The price series from Japan is chosen because it is one of most important markets where these varieties actually meet and compete, and because from Japan there is actually a price series availably with representative and sufficient volumes and history behind.

12 9 (b) The other graph,(no title on graph, top of page 15) was primarily chosen to show the general upward trend in world market prices seen over the past 8-10 years, where the currency effect on the NZD appears to "conceal" that fact for the last two years, if only looking at export prices in local currency. This graph was also intended to illustrate and reinforce the fact that the prices achieved for farmed Chinook salmon, are higher than those for Atlantic salmon We admit that the price series in the last graph (page 15) are not that suitable for making a point about price correlation, and that placing the graph under the chapter called "Price correlation examples", might have been misinterpreted. One should therefore also be careful in using mentioned price series for the kind of price correlation analysis as Hazledine has done. After all, the markets mix behind these prices are quite different and their relative share may be fluctuating from year to year, creating other reasons for the weighted average export price to change, than the general world market price trend. Besides, the Norwegian export prices covers around 95 % of the Norwegian harvests, New Zealand export prices cover less than 50 % of the total NZ volume, whereas Australia export only around 20 % of the Atlantic salmon production abroad. We also note that the price series used by Mr. Hazledine to perform his hypothesis is on annual data, and for only 9 years. To my knowledge, this is a very limited number of parameters in such an econometric analysis, and results deriving from it should therefore be used with caution A similar price correlation study on the Japanese import-prices, which are also shown graphically (page 14), would probably have yielded a different result In paragraph 59, page 59, the Kontali report includes a figure where the relationship between export prices for farmed Norwegian Atlantic salmon, farmed Australian Atlantic salmon, and farmed New Zealand Chinook salmon, is shown graphically. All prices are shown in USD / Kilo. The New Zealand price development is also shown in NZD / kilo, with the sole purpose of showing the effect of a shifting exchange rate between the NZD and the USD in the mentioned period. The explanatory text accompanying the graph, has unfortunately a "typing-error" stating "A weakening of the NZD in the period", instead of " an appreciation of the NZD in the period". The demonstrated

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